Weekly market overview October 1 - 5

The vast majority of sectors in the financial markets experienced a sudden retracement in the first trading week in the fourth quarter. One of the main stories was related to the U.S. 10-year Treasury yields which soared to 7-year high levels after the Federal Reserve Chairman Jerome Powell indicated a potential acceleration of the interest rates hikes by the regulator amid inflationary risks. That sell-off in government bonds and the sharp increase in the borrowing costs created worries in the U.S. equity markets and most of the stock indices plunged far away from the all-time highs, finishing the trading week with the worst performance since May 2018. NASDAQ index was leading the losses with 3% slide after Bloomberg published the story about Chinese hacker attacks on U.S. tech companies. In other markets, oil dropped due to an unexpected spike in U.S. crude oil weekly inventories, and industrial metals’ weakness was led by copper amid concerns about the worldwide demand. The currency market was mixed with the greenback’s limited strength versus most of its peers. However, several major currencies had a surprisingly strong performance, especially sterling and yen.

Jerome Powell
Source: Business Insider

The U.S. dollar index pulled back down off the weekly highs at 96.20, despite the spike in 10-year bond yields which made the U.S. government debt more attractive. There were two main reasons for that: risk-off mode due to the stocks sell-off and weaker-than-expected Non-Farm Payrolls report (134K versus 185K expected). Some analysts predict that the payrolls decline was related to hurricanes in September, and October figures should get back to normal. That was also confirmed by August NFP, which was revised up to 270K. One of the negative factors for the greenback was also a downside revision of Average hourly earnings in August (0.3% monthly). The unemployment rate, however, was published at 48-years low (3.7%) but that positive news did not help the dollar bulls to hold the mid-week gains, and DXY went down to 95.50 support on Friday. We suggest that the overall sentiment for the greenback remains on the bullish side, as the U.S. economic expansion is much faster than in other regions.

Euro continued its tight trading range with a slightly bearish bias. The only achievement for the bears was limited by 1.1462 support, and EUR/USD ended the trading week well above 1.1500 level. Italian turmoil eased traders’ concerns for the financial sector in Europe, and most of the economic data were positive for the long-term perspective of the single European currency and ECB’s plans to start the tightening cycle in 2019. This is why EUR/USD is still buoyant on dips and we do not expect any major shifts in that sentiment. Next trading week is forecasted to have a tight range as well as the economic calendar does not have any significant events except ECB meeting minutes to be published on Thursday.

One of the most interesting currencies to trade was the British pound. The first half of the past week was influenced by Tory Party Conference in the UK, and GBP/USD was under the bearish pressure because of the greenback’s strength on one hand and British Prime Minister’s comments on Brexit Deal. Theresa May stated that the no-deal Brexit scenario is better than a bad deal, and the British government will insist on their requirements regarding the trade conditions and Irish border issues. The market players reacted by selling sterling as such a scenario underlines tough negotiations with the EU and Brexit uncertainty. However, the European Union reacted with positive comments. Michel Barnier, the head negotiator for the EU side noticed that they work hard on offering the best possible deal conditions for the British side. The sterling bulls reacted immediately by the complete reversal in the market sentiment, and sterling soared versus not only the greenback but also versus EUR, CHF, AUD, NZD and CAD. The pound cross-rates were the most profitable currency pairs to trade on, as these currencies showed the weaker performance versus the U.S. dollar, especially it was related to AUD and NZD. The upcoming week is full of important events starting from the Brexit deal announcement (if it happens though) and a pack of important economic data from the UK. The British Pound might soar if the news will have a positive effect.

Japanese Yen had a surprisingly strong performance in the second half of the past trading week, and USD/JPY pulled back down from highest levels since January 2018 (114.53). The main concern of the USD/JPY bulls was caused by the dropping stock indices in the U.S. and the risk appetite went down sharply. So, most of the yen traders went back to the safety and USD/JPY wasted all of the weekly gains, finishing almost flat on Friday. On the long-term perspective, USD/JPY is still attractive for the bulls, as the interest rates differential is growing between the U.S. and Japan. Moreover, the recent spike in the 10-year bond yields makes the American assets even more attractive for Japanese investors. Although the equities plunge has to be absorbed by the market players, and stock indices should come back to the bullish market conditions before USD/JPY will resume its uptrend. Buy-on-deeps trading strategy looks to be the most profitable on mid-term perspective.

The worsening situation in the U.S. - China relationship, falling stocks and commodity prices with copper leading the losses among the industrial metals sector - these are key factors of the weakness in AUD/USD and NZD/USD. Even positive economic data did not hold Aussie and Kiwi bears to keep selling these currencies, posting new yearly lows. The Canadian dollar had a mixed price action due to the strength of the local economy which was confirmed by positive employment report. However, Ivery PMI report was weaker-than-expected on Thursday, and the dropping crude oil prices did not support the Loonie. USD/CAD finished the trading week slightly below 1.2950 resistance and further upside risks are likely with 1.3000 level as the nearest target for the bulls.
See also: