This week should be a wake-up call for all investors. The market disruption caused by retail traders swapping ideas over Reddit and squeezing out major hedge funds is unprecedented, but corrections after record highs in stocks are not. For the past year, equities barrelled to new milestones on a monthly basis and, as this trend continued, the risk of a correction grew. However, the vaccine kept investors and central bankers confident that a strong recovery is ahead. But when rallies are as extended, as the ones we’ve seen last year in stocks, it rarely takes much to spook investors into taking profits. The sharp sell-off this week was triggered by the GameStop (NYSE:GME) frenzy. Now that market participants no longer see a one-way rally, FX traders should brace for more volatility.
For what it is worth, despite the pullback in stocks, currencies held up fairly well. The losses in EUR/USD and GBP/USD were limited and USD/JPY rose to its strongest level in two months. Typically, the Japanese Yen is driven higher in market corrections, but unwinding of short dollar bets was the leading driver of currency flows. U.S. data hasn’t been terrible and Fed Chairman Jerome Powell confirmed that its “too early to focus on tapering dates.” Friday’s personal income, personal spending and Chicago PMI numbers surprised to the upside. The University of Michigan Index declined, but the drop was modest. Next week, the U.S. releases non-farm payrolls, manufacturing and service sector ISM numbers – these are all market-moving releases but, as we’ve seen in recent weeks, they could be overlooked quickly. Currencies should continue to trade on risk flows, which is positive for the U.S. dollar.
Better than expected Canadian GDP numbers helped stem the slide in USD/CAD. The Canadian economy grew 0.7% in the month of November, with prices rising 1.5%. Canada releases its latest employment and IVEY PMI numbers on Friday. These key releases could determine the near-term trend for loonie. Meanwhile, it is not often that we see divergences in the Australian and New Zealand dollars, but on Friday, AUD sold off, while NZD rallied. Improved data were reported by both countries, with New Zealand seeing increased consumer confidence and Australia seeing higher price pressures. It’s a busy week ahead for Australia, with a Reserve Bank meeting, retail sales and PMI reports scheduled for release.
The euro rallied on the back of stronger Eurozone data on Friday. Germany and Spain avoided contraction in the fourth quarter, while France slowed less than expected. Germany also reported a sharp drop in unemployment rolls, against a forecasted increase. We continue to see evidence of the Eurozone doing better than economists feared. Next week we’ll get a look at how the Eurozone as a whole performed. Sterling stabilized with no major economic reports on the dock next week.