Weekly market overview February 25 - March 1

The last week of February brought certain changes in major trends in the financial markets, at least temporary. The United States reported a bunch of macroeconomic reports which have been postponed due to the government shutdown earlier. The Federal Reserve Chairman Jerome Powell expressed some optimism about the economic growth during his testimony in the Senate, lifting the fixed-income market. US President announced that the negotiations deadline will be postponed and US-China trade talks will continue in order to find a compromise on the trade deal. Pakistan-India tensions eased quickly without turning into an escalating conflict between the two countries with the nuclear weapon. The Bank of Japan had announced another round of softer monetary policy, supporting local exporters and lowering the exchange rate of the Japanese yen across the board. All of those factors were supportive for the global reserve currency - the US dollar - which gained strength versus its major peers, especially the yen and commodity currencies. Euro kept climbing North but slowly, while the British Pound, in contrast, charted a sudden breakthrough in the vast majority of its cross-rates, especially in GBP/JPY which surged for 2.26% last week on the back of optimistic news from the Brexit story. However, the overall fundamental environment was not so clear as some of the equity investors would have liked, and US stock indices remained almost flat, while overseas benchmarks added 1% on average. The only exception was the British FTSE 100 index which shows an opposite correlation with the Sterling during the last six weeks.

Although the greenback gained some strength versus several major currencies last week, the US dollar index measuring a volume-weighted basket of six majors finished the trading week almost flat (-0.05%) with long shadow on the weekly candlestick. There are several reasons for such a divergence. First, the GDP report showed that economic growth slowed in the fourth quarter of 2018. Yes, the pace of the decline was not that sharp as some analysts were predicting earlier, but it slowed. Second, the carry-trade flows continued weighing on the greenback despite the month-end repatriation flows and the fact that several emerging markets currencies were vulnerable to the selling pressure. Third, the macroeconomic data was rather mixed in the United States than optimistic. The ISM manufacturing PMI, Michigan consumer sentiment index, factory orders and housing starts declined, while Core PCE prices, Richmond PMI and pending home sales improved and PCE deflator remained flat. The upcoming week should clarify the situation in the labour market as the Non-Farm Payrolls report will be published. It’s hard to expect the same high number of jobs created as in January, as the impact of the government shutdown could be delayed. Fourth and, probably, the main driving factor for the greenback was the Fed Chair who was testifying in the Senate last week and hosted a press conference on Friday. He was much more confident about the economic growth and much more hawkish in the scope of the monetary policy perspective, insisting on the sustainability of the world’s largest economy. The fixed-income market players reacted with heavy selling of the US 10-year treasuries, which pushed the yields towards six-weeks highs. Some analysts started pricing in a rate hike instead of the rate cut this year, and that was the key factor for the greenback’s strength last week. For example, USD/JPY had tested 112.00 technical and psychological support for the first time in 10 weeks. And that impressive rally was not related to the equities market as major stock indices remained almost flat in the US.

In contrast, the greenback was much weaker versus the British pound, which gained strength on the back of Brexit optimism. The likelihood of the deadline to be postponed from March 29 is getting higher every week, and investors, as well as currency traders, did not hesitate to use that news to push the Sterling higher across the board. For instance, GBP/USD added 1.15% to the exchange rate, GBP/AUD grew by 1.85%, while GBP/JPY and GBP/CAD were overperforming the whole currency exchange market with impressive results of +2.26% and 2.38%, respectively. Moreover, the Sterling bulls managed to close the trading week at the level of 1.32055 dollars per pound for the first time since July 2018, and the odds for a long-term uptrend became more convincing than during the last bullish retracement in Autumn last year.

One more reason why the US dollar index did not reflect the greenback’s strength versus other currencies was Euro. The macroeconomic data was in favour for the single European currency as the unemployment rate fell significantly in January, CPI remained flat and Manufacturing PMI improved. German retail slaes recovered, French consumer spending grew, EU Business and Consumer Survey showed that things aren’t that bad as some of the euro bears would have hoped for. As a result, EUR/USD kept climbing North and even tested the technical resistance of 1.1420 mid-week, however, failed to hold the gains and slipped back South toward 1.1350 support. Generally, weekly gains weren’t so impressive as for the Pound (+0.22%), but plus is not minus, is it? The upcoming week could bring more light to the uptrend of EUR/USD as ECB monetary policy update is expected.

Commodity currencies had their own reason for the price action last week, besides the month-end repatriation flows. As we already mentioned the spike of US 10-year Treasury yield, precious metals plunged on the back of profit-taking and safe-haven outflows. Gold lost more than 2% of its value while Silver sank for more than 4.5%. That was completely negative news for the Australian dollar which traditionally depends on the price of gold due to the large volume of exports from Australia. AUD/USD went South for 0.67%, while the New Zealand dollar followed its closest neighbour. NZD/USD lost 0.70% of its exchange rate.

Weekly market overview February 25 - March 1

The Canadian dollar had a much more fascinating story last week. USD/CAD was trading lower initially, and even tested 1.3100 support level which is technically crucial. The main driver for that was a sudden drop of US oil inventories for -8 million barrels, while a falt reading was expected. WTI Crude price jumped above $57 per barrel on that positive news for the second time this year, supporting the Loonie. However, the supply issues overshadowed the demand increase, and WTI Crude dropped to $55 per barrel, finishing the trading week with losses of 2.5% approximately. Moreover, Friday was entirely ugly for the Loonie bulls as macroeconomic data was negative for the hawkish scenario of a rate hike by the Bank of Canada, which meets for the rate decision in March. The combination of those two factors was the background of impressive bullish run by USD/CAD which soared for more than 200 pips in one single day. The taking-profit emotional impact was so dramatic that the pair even tested highs of 1.3500 for a short time, and closed the week above 1.3300. The upcoming week’s price action will depend on how deep oil prices could dive on the back of oversupply story. There are two more interesting assets to monitor next week: USD/ZAR which gained another 1.7% last week, breaching the psychological resistance level of 14.20 rands per dollar, and Palladium, which added 3.2% more to its price, extending the gains above $1500 per ounce. Palladium already soared for 70% in six months, which makes that precious metal one of the most lucrative investments nowadays.
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