Risk aversion trade came back to the financial markets this past week. Several macroeconomic reports, two major central banks, and, even mainly, trade talks forced investors to lower the risk appetite noticed in January. As a result, major currencies dropped significantly versus the dollar king, which gained strength on the back of safe-haven capital flows. Commodity currencies were hit the hardest led by the Australian dollar's 2% plunge after RBA's decision to stay pat and Governor Lowe's dovish comments. New Zealand dollar also lost more than 2% of its value versus the greenback due to the weakest employment report in a year. The single European currency charted the worst weekly result since September 2018 due to the economic slowdown in the region which was confirmed by several major reports this past week. EUR/USD finished the trading week just shy of 1.13 support. The British Pound continued falling until the Bank of England's 'unchanged' interest rate decision and during Gover Carney's press conference. However, GBP/USD managed to find a local bottom around 1.2850, recovering a part of losses on Friday and bouncing 100 pips off that level. Despite the safe-haven flows, Japanese Yen finished the week almost flat versus the US dollar but strengthened against risk currencies. USD/CAD was comparatively volatile, climbing above 1.3300 resistance together with WTI Crude Oil's decline (-4.76% weekly) and falling back to 1.3250 support after surprisingly strong Canadian employment data.
The overall impression from the foreign exchange market's price action was more like a technical retracement on profit-taking and thin volume conditions due to the absence of Chinese traders celebrating the New Lunar Year. However, the depth of the decline raised many questions about the sustainability of January's trend and investors’ risk appetite across the board. The main gainer of all those changes in traders’ sentiment - the US dollar - gained strength despite the lack of any major macroeconomic news. Moreover, the Federal Reserve officials remained dovish in their comments regarding the monetary policy perspective in 2019. US equities did not support the world’s reserve currency, hovering around local top levels and ending up almost flat compared to the previous week’s close. The only trigger driving additional speculative demand for the greenback was the obvious contrast between the US economic robust growth and the rest of the regions, struggling from the slowdown. It was kind of lagging response to the strong Non-Farm Payrolls report last Friday. The key divergence here is that the deadline for government funding comes next week and there are no significant arrangements between political parties in the United States to pass the bill through House and Senate, avoiding another shutdown. Donald Trump played an aggressive role in the dollar's strength as well. His comments in House and twits about the development of U.S.-China trade negotiations did not add optimism for investors. There is nothing but hope that the two largest world's economies would finalize the deal, cancelling 25% import tariffs worth $200 billion in mutual trade. The deadline is March 1 and there is an option to postpone it further but it would not be positive for markets, anyway.
The single European currency declined mainly due to the dollar’s strength and weak macroeconomic data in the EU. German Factory orders dropped, industrial production declined and the EU trade balance narrowed its positive surplus. EUR/USD was sliding throughout the whole trading week but it was not kind of a sell-off but more the lack of buyers to support the most popular currency pair. Technically, the pair reached the bottom band of the ascending channel which holds prices since September last year. Euro bulls had to retreat to almost 1.1300 round figure but the defensive barrier in the range of 1.1250/80 is much stronger and bears would struggle to crack it right away with a single attempt as a decent amount of postponed buy-orders is placed there. Next week should bring a more clear picture in the light of updated Eurozone GDP figures with possible downward revision after the German retail sales' decline.
Sterling traders were expecting British Prime Minister Theresa May to clarify the Brexit situation as less than 50 days remaining before the deadline and there is still no deal with the European Union. She failed to present any significant changes in the Brexit conditions yet and she's going to Brussels next week to ask the EU restarting the negotiations process, especially for the Irish border issue. So far, European officials were refusing to review the deal conditions and there is a doubt for any changes in their position next week. Moreover, the Parliament vote is scheduled for February 13 and downside risk still weighs on all pound pairs including GBP/USD and GBP/JPY. The Bank of England met this past week for the interest rate decision and a unanimous vote to leave the monetary policy at the same level pushed Sterling tumbling. Monetary Policy Governor Mark Carney hosted a press conference right after the decision was published. The main line of his comments was to state that BoE will not make any steps to change the financial conditions in the UK until the government was able to announce exact Brexit conditions. Although the rate cut is not on the table yet and the previous rhetoric was on the side of gradual and limited hikes, Carney is not able to predict all scenarios and most probably, the Bank of England will stay pat in foreseeable future, despite some positive news on the macroeconomic side including the labour market and earnings growth. GBP/USD ended the trading week with a sideways consolidation tight range of 40 pips but the upcoming trading week could change that temporary quiet situation dramatically.
The Australian dollar crashed after RBA Governor Lowe eliminated market's expectations for a possible interest rate hike this year. Moreover, his speech in a press conference after the interest rates 'unchanged' decision fuelled modest expectations of a rate cut in 2019. That all was completely shocking for Aussie bulls who were hoping for much more hawkish rhetoric by the regulator after several stronger-than-expected economic reports published earlier. As a result, AUD/USD dropped 1.6% in a blink of an eye and continued falling throughout the rest of the week, breaking through important technical support of 71 cents. New Zealand employment report disappointed investors and traders as well. The unemployment rate was revised for the previous period to 4% from 3.9% and the latest figure even jumped to ugly 4.3%. Global uncertainty and risk aversion trade pushed NZD/USD to 0.6744 and the weekly decline was the sharpest in 12 months.
In other markets, WTI Crude Oil retraced from the local top, losing almost 5% on the back of growing inventories in the United States and global demand concerns. That price action was in favour of USD/CAD as the pair climbed above 1.3300 resistance. However, the Loonie weakness comes in contrast to the Canadian economic growth which confirmed to be much more sustainable than previously thought. Friday's employment report showed a surprisingly strong reading of 62.8 thousand jobs created in January while analysts were forecasting 8K only. USD/CAD dropped more than 80 pips in two minutes right after the report but kept climbing later. The next week should help Loonie traders to find a cue in the next direction but, anyway, the Bank of Canada will definitely face more pressure to tighten at least twice this year.