Euro rally continues amid sharp commodity sell-off

Enrique Díaz-Álvarez14/Dec/2015Currency Updates

Last week the world’s financial markets were volatile again. Among the major currencies, the short-covering rally in the Euro continued, as the consensus trades that had been put in place in expectation of a continued US Dollar rally are unwound.

The common currency flirted with the 1.10 level against the Dollar, but a fairly strong retail sales report out of the US capped the weekly gains to about 1%, with Sterling trading almost tick by tick with the common currency.

The main action last week, however, was away from G4 currencies, as oil prices led commodities downwards again to fresh multi-year lows. Commodity-exporting currencies such as the Australian and Canadian Dollar and most emerging market currencies suffered.

Special mention goes to the incredible volatility in the South African Rand. After the orthodox finance minister was fired, the currency sold off as much as 12% at some point. News that another market-friendly minister had been named in his place late Sunday night caused an immediate rally of almost 6%. These wild moves are a timely reminder of the value of understanding and hedging one’s exposure to currency markets.

Major currencies in detail:


Second-tier data out of the UK last week painted a mostly positive picture. However, attention was rightly focused on the Bank of England’s Monetary Policy Committee meeting on Thursday.

As expected, interest rates were unchanged, as was the 8-1 vote. The minutes essentially replayed the message from the November Inflation Report. The extended discussion on pay growth did suggest that this continues to be perhaps the most important factor in the timing of a BoE rate hike. Next week’s pay data therefore takes added importance.

Until then, we expect Sterling to continue tracking closely with the Euro moves against the US Dollar.


The Euro continued to rise last week, buoyed by the aftereffects of Mario Draghi’s disappointing announcement.

However, macroeconomic data out was mostly disappointing. German industrial production undershot expectations, rising just 0.6% in October and remaining 1.1% below the average of the third quarter. This is the first hint we have seen of a fallout from the Volkswagen scandal, and the weakness in emerging market economic growth and massive cuts in investment plans by commodity producers do not bode well for the future.

We continue to expect the Euro to resume its downward trend just as soon as the overhang of stale Euro shorts is cleared out.


Retail sales finally snapped their weak streak and bounced back strongly in November. Although the headline number was hit by lower gas prices, the more critical core indicator rose 0.6% for the month. This is roughly consistent with overall growth in November consumer spending at around 4% annualised in real terms.

All eyes now shift to the Fed meeting this week. Economists (ourselves included) almost universally expect a 25 basis point hike. Traders are a bit less sure, but nevertheless the implied probability in interest rate futures is hovering near the 80% level. More important than this fully discounted Fed hike will be the rhetoric from the central bank as well as the number of dissenters.


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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.