Quick Overview
- Market Recovery After Volatility: Global markets recovered on Friday after a turbulent week marked by the highest volatility since 2020.
- FX Market Movements: The US dollar experienced fluctuations, with significant changes in the USD/JPY, USD/CNH, and USD/SGD pairs, reflecting broader market uncertainties.
- AUD and NZD Volatility: Both Australian and New Zealand dollars saw strong mid-week rallies, but gains were limited by technical resistance, hinting at potential further declines.
- Upcoming Events: The Reserve Bank of New Zealand’s decision and US CPI data on Wednesday are critical for FX markets, with potential rate cuts and inflation data driving future volatility.
- Economic Indicators: Additional key data, including Australian employment, Chinese industrial production, and US retail sales, will further influence market directions.
After what could only be described as a week’s rollercoaster, the financial markets breathed a sigh of relief on Friday. This comes after the most tumultuous period since 2020, as measured by the VIX volatility index, had traders and investors alike gripping their seats. Despite this brief calm, the FX markets are gearing up for further tests in the upcoming week, with critical US inflation data and a potential rate cut from the Reserve Bank of New Zealand (RBNZ) looming.
The week began with a dramatic sell-off across global markets, sending shockwaves through traders’ screens. Japanese stocks took a particularly harsh hit, experiencing their most considerable one-day loss since 1987. However, by the end of the week, a semblance of stability returned as markets clawed back some of their losses. Moderate gains on Friday saw the US’s S&P 500 and the tech-heavy Nasdaq edge by 0.5%, offering a glimmer of hope that the worst might be over – at least for now.
FX Markets: A Tale of Two Currencies
The FX markets reflected the broader market’s turbulence, with the US dollar initially rebounding during the week before easing lower by Friday. This was especially evident in the USD/JPY pair, which declined by 0.3%. The USD/CNH and USD/SGD followed suit, slipping by 0.1%. While modest, the drop in the dollar underscored the market’s cautious sentiment as traders weighed their next moves amidst the prevailing uncertainty.
The Australian and New Zealand dollars also found themselves on a wild ride. Both currencies experienced notable rebounds mid-week, aligning with the recovery in equity markets. The AUD/USD, for instance, surged from below 0.6400 on an intra-day basis to two-week highs at 0.6600 – a more than 4.0% rally over the week. However, this celebration was short-lived as the pair encountered resistance at the 200-day exponential moving average (EMA), causing a reversal in fortune. With the AUD/USD now trading below the key 200-day EMA, the pair faces potential further losses in the coming days.
Similarly, the New Zealand dollar (NZD/USD) experienced a dramatic 3.2% rebound from its lows, peaking near three-week highs at 0.6035. Yet, like its Australian counterpart, the Kiwi’s rally appears to have run out of steam just below the 200-day EMA, signaling that this might be as good as it gets – at least for the short term.
All Eyes on the RBNZ and US CPI
As the dust settles from last week’s volatility, the spotlight now turns to upcoming events that could shake the FX markets again. The Reserve Bank of New Zealand’s decision on Wednesday is set to be one of the week’s most closely watched events. While a slim majority of economists expect the RBNZ to hold steady, market sentiment is skewed towards a rate cut, with a 73% chance of a decrease priced in, according to Bloomberg. This potential move by the RBNZ could send ripples through the FX markets, particularly affecting the jittery New Zealand dollar.
On the other side of the Pacific, the US Consumer Price Index (CPI) data, also due on Wednesday, will be critical ahead of the Federal Reserve’s September meeting. Should inflation numbers come in higher than expected, it could dash any hopes of a rate cut, thereby further unsettling the markets. Traders will be watching this data like hawks, as it could set the tone for the remainder of the month.
Broader Economic Data to Watch
While the RBNZ decision and US CPI data will dominate headlines, several key economic indicators could influence market movements this week. Australian employment data, Chinese industrial production and retail sales, and US retail sales, all scheduled for Thursday, will also be under the microscope. Each of these reports could provide further insights into the global economy’s health and potentially drive currency markets in unexpected directions.
The Australian employment figures will be fascinating, as they might offer clues about the Reserve Bank of Australia’s future policy moves. Meanwhile, China’s industrial production and retail sales numbers will be scrutinized for any signs of recovery in the world’s second-largest economy. In the US, retail sales data could provide an influential gauge of consumer spending, a critical component of the US economy.
Looking Ahead: Brace for Impact
As we head into the new week, the sense of calm that settled over the markets on Friday could very well be the eye of the storm. With several key events on the horizon, traders and investors should prepare for another discussion about volatility. The FX markets, in particular, are likely to be in for a bumpy ride, with the US dollar, Australian dollar, and New Zealand dollar all facing significant potential shifts.
In the end, while the markets may have regained some composure after last week’s turmoil, the underlying uncertainties remain. As the FX markets brace for impact, traders would do well to keep their eyes on the data, their ears to the ground, and their nerves in check. The calm may not last long, and when the next wave of volatility hits, those who are prepared stand to weather the storm the best.
