Weekly market overview May 6 - 10

Risk aversion is back to the financial markets as geopolitics suddenly appeared to be the main driver for the price action this past week. Besides the mixture of macroeconomic data released, U.S.-China trade worries were weighing on investors' sentiment again as U.S. President Donald Trump decided to pull the trigger of new import tariffs for most of the goods from China. North Korea renewed the geopolitical tensions by launching missiles after 18 months of silence and negotiations. Iran escalated relationship with Western Countries, threatening to use weapons massively, while Venezuela failed to find an exit from the political crisis. As a result, global equities were sold-off, retracing from all-time highs; some of the major benchmarks lost 4% of the value. Risk currencies plunged, while the New Zealand dollar was hit the hardest after more dovish central bank's statement than traders expected. Several significant economic events affected the foreign exchange market as well. For instance, the Japanese Yen strengthened after the Chinese reports showed weak results in trade balance and inflation. The Swiss Franc soared on risk aversion, and capital flows into safe-haven assets. The British pound was vulnerable to disappointments in GDP figures and the lack of political resolutions about the Brexit topic. Nonetheless, some of the risk currencies managed to stay flat versus the greenback due to impressive economic achievements. The Canadian dollar recovered mid-week losses after stronger-than-expected Labour market data, and the Australian dollar's weakness was limited after robust retail sales.

The U.S. dollar was trading with a mixed bias this past week despite the deep retracement of U.S. stock indices. Moreover, the S&P 500 benchmark managed to pare most of the losses, finishing the trading week with -0.30% result. NASDAQ and DJIA lost 2.5% of the value on average, but U.S. 10-year Treasury yields were almost unchanged. The main threat to the world's leading economy is the trade war with China, which was renewed as both countries failed to reach an agreement after six months of negotiations. However, some analysts expressed confidence that Trump's decision to impose new import tariffs would force the Chinese government to agree for his conditions of the deal. Anyway, new tariffs worth 200 billion dollars are becoming a real nightmare for Chinese exporters, who suffer from the decline in exports volume and a decrease in the production, according to the recent reports. The rest of the world would get stuck in trade wars as well, and currency traders did not hesitate to react on those events last week.

The world's reserve currency had lost only 0.10% of its value versus volume-weighted basket of six major currencies despite the lack of inflationary pressure as both PPI and CPI reports showed a decline in April: Producer Price Index fell to 2.2% year-over-year compared to 2.3% in March, while the Consumer Price Index was reported at the level of 2.0% only. Those figures decrease chances for the U.S. Federal Reserve to hike the interest rates as the regulator won't have any justification for that with current low inflationary pressure. On the other hand, those reports are mostly positive for equities, which are vulnerable to financial conditions. It would be fascinating to observe the market's reaction on the further development of the situation with Chinese imports as most of the U.S. stock indices reached technical support levels and the bulls must step in if they are intended to keep the long-term uptrend in play. Otherwise, we might see a dramatic reversal in the bullish run started in January this year. The U.S. dollar index, in contrast, might face another tough period of selling pressure as the technical sentiment turned negative. However, the fundamental side of things makes the greenback attractive for long-term savings or speculative positions.

The single European currency appreciated 0.32% versus the greenback this past week, which is above the average if we looked at the dollar index. The main reason was a sudden pick up in the economic activity as Eurozone Retail Sales improved, while the Purchase Managers Index jumped in the services and manufacturing sectors. The European Central Bank released its meeting minutes, and the event was happening together with President Mario Draghi's speech. European traders learned that things aren't that bad in the region, and the ECB does not plan to impose new soft monetary policy measures, leaving the door open for an 'unchanged' scenario if the economic data was positive. An extreme volume of additional liquidity is not a necessary step for the regulator as it might hurt the economic growth and Euro's attractiveness in overseas borrowing capital markets. As a result, EUR/USD edged higher, retracing to 55-days moving average for the second time since April 15. If the bulls were able to keep supporting the pair, we'd see further strength, especially in the scope of greenback's weakness across the board. However, the resistance of 1.12500 still holds, working as the defensive barrier. Until the resistance is clearly breached, euro-dollar remains vulnerable to slide south further.

The British Pound fell sharply, especially in cross-rates. For example, GBP/USD lost 175 pips (-1.73%), but GBP/CHF plunged 240 pips (-1.79%), and GBP/JPY was one of the weakest currency pairs this past week (-345 pips or 2.35%). That was unexpected after a sudden bullish rally last Friday when the Sterling soared without any fundamental events. The decisive day for British traders was Friday as the British economy reported the Gross Domestic Product, which failed to meet the analysts’ expectations, declining -0.1% month-over-month and remaining flat at 1.8% year-over-year. Despite that disappointment, other reports were robust as Industrial production improved, manufacturing output increased, while the trade balance narrowed the negative surplus. Therefore, the Sterling unusual weakness cannot be explained just by the fundamental environment in the U.K. The main concern was related to geopolitics and potential troubles in the global economy due to the trade war between U.S. and China. Traders and investors had panic and overreaction, according to many analysts, and the Pound should get back to normal once the dust settled. GBP/USD could keep hovering around the same psychological level of 1.3000 for a while and then appreciate rapidly as the currency remains hugely undervalued from the fundamental side of things.

Another weakest currency was the New Zealand dollar on the back of a dovish economic statement by the Bank of New Zealand released this past week. Currency speculators started to price in a rate cut this year, and the currency plunged versus the U.S. dollar and the Japanese Yen. NZD/JPY hit a new six-month low, and the technical sentiment became even worse, promising further losses in the nearest future. The Japanese Yen and Swiss Franc were strengthening across the board together with gold and other safe-haven assets on the back of risk aversion as global investors were liquidating high-yield speculative positions. The fear was also noticed in WTI Crude Oil market as the black gold price failed to continue the uptrend despite much weaker-than-expected inventories report in the United States and tensions with Iran. The Canadian economy managed to impress analysts with a series of unexpectedly robust reports. Ivey PMI, Housing Starts, Imports and Exports volume were all in the green, while the employment change jumped ten times compared to the market’s consensus, and the unemployment rate dropped. As a result, the Loonie pared all of the mid-week losses, despite the lack of risk appetite across the board. USD/CAD charted a long shadow on the weekly timeframe, suggesting that further downtrend is likely as local resistance levels have been found. Moreover, the market players could start pricing in possible tightening by the Bank of Canada in June, and that would add the selling pressure on the pair.
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