FINMAX - Analytics

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    Weekly market overview May 20 - 24

    A mixture of geopolitical and economic factors drove the financial markets’ price action this past week. Since traders remained nervous on the back of trade wars’ uncertain impact on global economic growth, global equities continued sliding. The risk aversion came together with seasonal factors forcing investors and financial institutions closing long-term positions before the summer vacation season. All of the high-yield stock indices were vulnerable to further decline after charting multi-months highs. The weakest benchmark among majors was the NASDAQ index, which lost more than 2% of its value. 

    On the other hands, safe-haven assets were in demand as U.S. 10-year Treasury yields dropped to 6-month lows, gold price edged higher, while Swiss Franc and Japanese Yen gained strength in the foreign exchange market. The inverse correlation between the U.S. dollar and equities did not work this past week amid several fundamental reasons. Although FOMC minutes were more hawkish than analysts expected, the U.S. economy started showing signs of a slowdown, while Treasuries were losing attractiveness on the back of narrowing interest rates difference with other regions. Emerging markets and risk currencies appreciated the greenback’s weakness across the board, bouncing off the near-term bottom. Politics had an unusually strong influence on currencies, especially in the European Union, United Kingdom and Australia. Commodities were sold off led by WTI Crude Oil, which lost almost 6% of its value. 

    The U.S. dollar index retraced from past week’s highs, declining by 0.4%. Some of the analysts started predicting a near-term correction for the greenback due to weaker-than-expected macroeconomic data. After the retail sales report missed the market expectations, the housing sector showed weakness with Existing and New Home Sales declining in April. CBI Industrial Trend Orders survey showed a worse situation in May, while the Manufacturing and Services Purchase Managers Indexes fell, dropping to six-month lows. Core Durable Orders were flat in May, but the headline figure plunged with downwards revision of the previous period. Even though the Federal Open Market Committee was hawkish, underlining the strength of the economic growth, investors started pricing in a worst-case scenario as 10-year Treasury yields declined, and equities were sold off. Fed Chair Powell kept insisting on the need to hike the interest rates this year, however, the markets’ reaction was completely opposite. The greenback’s role of the world’s reserve currency was not in the market’s focus despite the fact that the U.S. economy remains in much better shape than in other regions. What’s interesting is that safe-haven currencies (CHF and JPY) gained strength together with emerging markets assets (CNH, ZAR, MXN). Norge and Swedish Krone were among the strongest currencies versus the greenback this past week.

    European data was soft again, but investors refused to push EUR/USD below 1.1100 round-figure support level. The pair was sliding throughout the trading week after German GDP came in line with the expectations, while Manufacturing and Services PMI, Current Assessment and IFO Institute Business Climate Index declined. Although inflation and employment picked up the growth momentum in Europe and France, Eurozone PMIs were negative, extending the weakness period. Nonetheless, politics overshadowed economics this past week, and Euro bounced off weekly lows on the back of optimistic expectations for EU elections, which will take part this Sunday. The second-largest democratic event in the world (after Indian elections) will happen this weekend as 28 countries across the European Union will elect 751 members of Parliament, which will influence crucial decisions in the next five years. Upside gaps are possible in case if the election results were in line with investors’ expectations. 

    The British Pound’s price action was also driven by politics as Premier Minister Theresa May finally resigned after several failed attempts to push the Brexit deal through the Parliament. Investors comprehended that news as unfavourable as it brings even more uncertainty to the Brexit equation. GBP/USD kept falling this past week, testing lows around 1.2600 support despite the greenback’s weakness across the board. Several Pound crosses including GBP/JPY and GBP/AUD dropped to six-month lows. Although another Brexit referendum is likely as British politicians started realizing what a stupid mistake the Brexit was, it’s hard to imagine the Sterling reversing the recent downtrend. Economic reports are traditionally ignored as all eyes are on the political side of things. The Bank of England clearly stated that the interest rates won't’ move anywhere from current low levels until the Brexit uncertainty stopped weighing on investors’ sentiment. The past week showed that the British inflation slowed down the pressure, while Retail Sales jumped in April. As a result, GBP/USD bounced off the weekly lows, gaining more than 100 pips on Friday and finishing the trading week almost unchanged. 

    Another region with unexpected political influence was Australia as local vote brought surprising result and Premier Minister Morrison’s victory. AUD/USD surged 0.86% this past week, retracing from multi-month lows as investors were happy with the elections. The economic calendar’s influence was limited as Manufacturing PMI was flat, while RBA meeting minutes did not bring anything new to the data-dependent monetary policy. Governor Lowe spoke on Tuesday, repeating the same mantra of readiness to cut the interest rates in case if things worsened. New Zealand dollar followed the closest neighbour in the bullish recovery, but the growth pace was much slower. 

    The Canadian dollar stuck in a tight range versus significant currencies. The reports flow was mainly positive recently, and the Bank of Canada faced pressure to hike the interest rates in the upcoming meeting in June. This week’s Whole Sales and Corporate Profits reports confirmed that suggestion, while a jump in Retail Sales impressed even most optimistic economists. However, many analysts noticed that the Loonie had lost its traditional correlation with the price of oil. For example, WTI Crude price dropped almost 6% after U.S. inventories jumped to 4.5% million barrels after a decline of -0.5 million in the previous week. However, USD/CAD did not chart any mirror reaction as it usually happens with the currency pair. Instead, traders were testing 1.3400 support. Oil price could fall further as the supply/demand issues, as well as geopolitical uncertainty and profit-taking flows, while the Canadian dollar could remain in the same tight range as investors are intended to listen to the regulator before positioning for the rest of the year. If the BoC hiked the rate, USD/CAD could start a long-term downtrend. 

    A whole pack of data was released in Japan. The first half of the trading cycle was positive for USD/JPY, which gained strength after Japanese Q1 GDP, industrial production, machinery orders and adjusted trade balance beat the market expectations. The pair tested 21-days simple moving average at 110.60, but the bulls failed to hold the gains, and dollar-yen reversed the action, sliding towards 109.30, and erasing all of the previous achievements. As long as the U.S. dollar is in the correction mode, and the risk aversion and economic uncertainty pressure global equities, the USD/JPY is vulnerable to further action southwards.


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