The Forex Week In Review

The Week That Was….

The  first trading week of the New Year for Forex markets has certainly been an interesting one. We began with a heavily risk-off tone we saw in response to developments in China. Data weakness out of the world’s second largest economy prompted sharp volatility in Chinese equity markets which led to “circuit breakers” triggering a temporary trading ban. Markets reacted strongly with Equity markets sinking and safe-haven currencies soaring as investors fled to safety. To add further concern there was news early in the week that North Korea had successfully tested a hydrogen bomb, further increasing the demand for safe-haven currencies.

The release of the December FOMC meeting minutes was more Dovish than many were expecting as it was revealed that, although the decision to raise rates was unanimous, for some Fed members it was indeed a close call and “significant concern” for the inflationary environment was expressed. The strength of the US Dollar was cited as a key factor driving the  “uncertainty and risks present in the inflation outlook,” Indeed the mixed views held by the Fed were present in speeches made on Thursday by Fed’s Lacker, who foresees four further rate increases in 2016, and Fed’s Evans who only sees two further rate increases.

Into the close of the week full attention was on the first NFP release of 2016 with December NFPs expected to come in at a firm 200k. Following on from the impressive ADP employment figure the NFPs actually came in at an impressive 292k, pulling the 4 month moving average up to around 250k. Despite initial strength, USD was sold following the release as average hourly earning disappointingly printed 2.5% YoY in Dec against 2.7% expected and 0% MoM in Dec against 0.2% expected. Whilst the Unemployment rate remains at 5% and NFPs are strong, the lack of momentum in wage growth adds further concern for the Fed’s inflation target.

Forex Week In Review

  • USD Roughly unchanged over the week. FOMC minutes revealed that for some members, lift-off was a close call with significant concern expressed for the Fed’s inflation target. NFPs came in at a strong 292k with the unemployment rate unchanged at 5%, however, disappointingly low average weekly earnings weighs on USD bulls as a lack of momentum in wage growth further hampers the US inflation outlook.
  • EUR The single currency was driven higher over the week as the cascade in Equity markets saw the currency supported as carry trades and hedges were unwound. EZ CPI came in below expectations, which amidst a heightening of global growth concerns, has seen expectations building for further action by the ECB.
  • GBP The UK currency extended recent weakness weighed upon by a variety of factors; Brexit concerns, economic weakness, and diluted rate hike expectations. The latest UK Services PMI data printed below expectations, further weighing on UK rate hike expectations, whilst Trade Balance data showed a wider deficit than expected though a slight narrowing from the previous figure.
  • JPY The Japanese Yen was a firm favourite over the week as global growth concerns stemming from further China data weakness and geopolitical tensions stemming from North Korea’s testing of a hydrogen bomb both weighed heavily on risk-sentiment fuelling strong demand for the safe-haven JPY. The safe-haven driven strength has however increased expectations that the BOJ will be forced to act to temper the moves.
  • AUD The Australian Dollar suffered sharp losses this week in the wake of the dominant risk-off tone driven by Chinese data weakness and subsequent Yuan depreciation which weighed heavily on commodities and equities alike. Risk of further negative surprises from China keep’s the Aussie’s trading outlook pressured.
  • CAD The Canadian Dollar was driven lower over the week as Oil picked up where they left off and began 2016 with a $6 slide. Despite the heavy weakness in Oil markets, price was able to stage a mild recovery as news that Saudi Arabia had attacked the Iranian embassy in Yemen caused supply concerns mid-week. The latest Canadian employment data showed that the Unemployment rate remained unchanged at 7.1%  whilst the net-change in employment unexpectedly improved to 22.8k surpassing expectations of an 8k reading.