The first week of the year has been market by acute volatility in equity, interest rate and currency markets, with sizeable intra-day swings including a temporary flash crash in the USD/JPY cross below 105 on 3rd January. Mixed macro data added to the confusion.
Currency markets appear to have found their footing, at least for now, but the Dollar remains under pressure having weakened about 0.8% in the past week. The Euro is down 0.6%, not helped by weak German and Eurozone macro data. Decent UK PMI data for December helped shore up Sterling but the forthcoming House of Commons vote on the draft Brexit deal remains a critical hurdle.
The Swiss Franc and Kiwi Dollars are broadly unchanged year-to-date while the Australian Dollar has been the outperformer, gaining about 1%.
Dollar
The Dollar trade weighted index has weakened to its lowest level since mid-October. Very strong labour market data for December released on Friday, including higher average earnings, initially drove the Dollar and US government bond yields higher.
However, Federal Reserve Chairperson Powell’s subsequent speech, in which he said the Fed was listening to markets and could adjust policy (including the balance-sheet run-off) quickly and flexibly, saw the Dollar and US yields drop. Markets are now pricing in 6bp of Fed rate cuts in 2019 and not buying into FOMC members’ expectations that it would be appropriate for the Fed to hike rates 50bp this year.
The combination of strong US non-farm payrolls data and a more dovish Fed saw US equities rally hard, with the S&P closing 3.4% on Friday.
Euro
The EUR/USD cross is back above 1.14 but the Euro has underperformed other major currencies in the past week and the trade weighted index remains near the bottom of a narrow range in place since mid-November. Macro data in the Eurozone’s largest economy have not helped. German CPI-inflation and factory orders in respectively December and November came in well below expectations.
Sterling
Sterling has remained range-bound thanks in part to decent manufacturing and service sector PMI data for December and a lack of Brexit-related news. But the biggest question for the UK, including financial markets, remains unanswered, namely whether the House of Commons will vote for or against the draft Brexit deal in a vote which government sources said would take place on 15th January.
Australian Dollar
The Australian Dollar was rocked by the flash crash in USD/JPY last week but has recovered and in trade weighted terms is back near the levels which had prevailed in late December.