There was plenty of movement in the financial markets last week and that has seen some of the years biggest trends come under serious pressure. Technology stocks moved lower once again and this led to some volatility in the main stock markets -- though losses were contained by accommodative comments from Fed Chair Janet Yellen. A 20% plunge in Twitter may have been the main culprit for the choppiness in equities, while in currencies, several pairs reversed course following central bank announcements.
Most notably, the EUR/USD retreated from a year high of 1.3993 to 1.3760 by Friday afternoon as ECB Chief Mario Draghi spoke of new dovish policies. Elsewhere, the GBP/USD also retraced gains and that saw the currency fall back from 1.6997, just shy of the 1.70 barrier, while the USD/JPY continued to trade in a subdued manner around the 102 mark. The USD/CAD also moved lower while the AUD/USD posted it’s strongest weekly performance for three weeks. The New Zealand dollar, after hitting a four year high on 6th of May, dropped sharply as it emerged the RBNZ governor has plans to sell the currency in order to control the exchange rate.
Week Ahead:
Corporate earnings will continue to come out of the US and traders will also be watching the situation in Ukraine this week where a referendum will be held.
In economics, traders will be watching UK employment and the latest Bank of England inflation report (out on Wednesday). Later in the evening, there will be GDP numbers out of Japan, with analysts expecting an impressive 4.2% first quarter print out of the nation.
Then, on Thursday, we will see a host of CPI inflation reports out of Europe and then the US. Headline US CPI is expected to come in at 2%, up from last month’s 1.5%. On Friday, traders will be watching the latest University of Michigan confidence number.
EUR/USD
After first spiking up, the EUR/USD dropped aggressively as Mario Draghi’s dovish comments caused traders to re-evaluate their bullish stance. Draghi said that the ECB now felt ‘comfortable’ enough to implement new dovish policies but the key to Thursday’s reaction was that Draghi has now set out a time for the move to take place. Draghi mentioned that policy could be enacted in next month’s meeting once new staff projections are released.
Unsurprisingly, this saw traders jump off their long trades and the EUR/USD declined steadily through all support levels and finishing around 1.3760 on Friday.
With a clear timeline now in place for some monetary loosening, (itself a result of persistently low inflation in the Eurozone), the EUR/USD should be set for a rough couple of weeks. The euro traders had been looking for a catalyst to short the market and the guarantee of dovish policy could be the opportunity they need.
NZD/USD
The New Zealand dollar hit a four year high last week as traders fled the greenback and traders continued to buy up the Kiwi after the Reserve Bank of New Zealand raised rates. However, shortly after the NZD/USD hit the heights, traders had to reverse course as it became apparent that RBNZ Head Graham Wheeler is not a fan of the currency at these levels.
As an agricultural nation, heavily dependent on milk exports, the rise in milk prices and cost of the exchange rate has not been beneficial. This prompted Wheeler to suggest the bank would intervene and ‘sell’ the dollar in order to weaken the currency.
While this intervention may not necessarily halt the Kiwi’s climb, it does suggest that the currency could no longer be the one-way bet it has been.