This week sees focus on events in China, with Black Monday seeing weakness in USD and commodities before the following days saw a paring of some of the moves
FX markets have seen substantial price action as Black Monday took centre stage at the beginning of the week before the following sessions saw much of the move pared. After the PBoC failed to cut the RRR as expected over the weekend, fear stormed through the markets on Monday, seeing multiyear losses in both Chinese and US equities, with concerns also filtering through to FX markets, as uncertainty and volatility looked to threaten any possibility of a September rate hike from the Fed. As such, Monday saw the USD-index fall as much as 2.5% on Monday at its lowest point. After the sharp falls on Black Monday, Tuesday saw the PBoC react by cutting not only the RRR but also the lending and deposit rate and as such, the USD spent much of the rest of the week clawing back earlier losses.
USD was further bolstered throughout the rest of the week by data being more indicative of a rate hike, as well as a mixed bag of central bank speakers with the Jackson Hole symposium currently taking place, with Bullard, George and Mester striking a fairly hawkish tone, while Kocherlakota and Dudley’s comments were interpreted as slightly more dovish. The positive data, which helped bolster the greenback, includes the highest since Consumer Confidence Index Jan'15 (101.5 vs. Exp. 93.4), higher than expected durable goods orders (2.00% vs. Exp. -0.40%) and upwards revisions to Q2 GDP (3.70% vs. Exp. 3.20%, Prev. 2.30%). US data is likely to remain in the spotlight next week, with next Friday being the first Friday of the month and as such seeing the nonfarm payroll report, the final such release before the highly speculated about September FOMC meeting.
Away from the USD, EUR also saw interesting price action, with the shared currency initially strengthening on Black Monday touching the 1.1700 handle for the first time since January before seeing a downward trend through the rest of the week as a result of its use as a funding currency, with the PBOC selling EUR and buying USD in an attempt to balance out their currency reserves, which have been altered through their selling of T-Notes. Looking ahead, next week may see focus once again fall on EUR, with the ECB rate decision and press conference scheduled for Thursday. Little is expected to change in terms of the rate decision itself, however President Draghi’s rhetoric could prove significant given recent market events, with analysts at Barclays (LONDON:BARC) suggesting QE could be increased by the end of the year.
Finally of note, commodity currencies have also been in focus this week, with events in China highlighting demand concerns in both the energy and metal complexes in the first half of the week. As such the likes of CAD, AUD, NZD, NOK and RUB all underperformed as well as EM currencies such as BRL and TRY, which were also dragged lower by China. However, the second half of the week saw a paring of some of these losses, as commodity currencies followed the trend set by the likes of WTI, which saw its largest daily gain on Thursday since 2009.