Why Equities Could Affect FX Markets This Week

Equities have remained a big driver in FX markets over the past two weeks. Find out how you can profit from this.
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Equities have remained a big driver in FX markets over the past two weeks. Going from risk off to risk on from one week to another. 

Politics will be an important driver in financial markets this week. Risk sentiment will be a key focus once again. 

In this article we’ll go through important events that happened last week. We will also discuss events to look out for in the week ahead along with some trade ideas.   

Below are the countries we will discuss in this week’s article:

United States Dollar
Canadian Dollar
Great British Pound
Australian Dollar
New Zealand Dollar
Japanese Yen
Swiss Franc

 United States Dollar

What Happened Last Week 

The USD started the week on a strong note. It was driven by the bigger picture Fundamentals. 

On Wednesday the DXY reached its highest price since June 2017. Last Thursday the Dollar was pressured and sold off across the board. 

Some attributed the sell off to overcrowded USD positioning. 

On Friday we had the October US employment report. It was a very positive jobs report overall. 

Headline employment printed higher at 250K versus expectations of 190K. The unemployment rate stayed flat at 3.7% as forecasted. 

The biggest focus fell on Average Earnings data. Wage inflation has a big impact on overall inflation expectations. 

Higher inflation increases interest rate expectations, which in turn boosts bond yields and currency values. 

The Average Earnings YY and MM data came in as expected. 

Average MM came in at 0.2%, while Average Earnings YY came in at 3.1%. 

This was the fastest wage growth since April 2009. 

After an initial muted reaction, the USD strengthened across the board. 

The Week Ahead 

The US calendar starts with ISM Non-Manufacturing PMI on Monday 5 November. 

The prior release of 61.6 was the second highest on record from 1997. This showed that the US is expanding well above trend.  

Markets are expecting the PMI to slow to 59.3 from 61.6. Even a slight drop would still be consistent with a robust economic expansion. 

On Tuesday 6 November we have the US mid-term elections. According to Danske Bank, we should have the results on early Wednesday morning. 

ING explains that the election outcome can impact USD moves for the rest of 2018. They state that polls suggest the House will go to the Democrats. 

If this happens it can have an impact on the following points: 

ING expects that a Democrat majority to be Dollar negative. They also expect that a Republican majority to be Dollar positive. 

On Thursday 8 November we have the latest FOMC rate decision. 

Wells Fargo expects an upbeat tone due to recently strong jobs and growth data. They are not expecting the FED to signal any changes to the current rate path. 

Thursday’s meeting will not include a press conference or provide updated projections. This means not a lot is expected to change from the previous meeting. 

So far the FED is still on track for a December rate hike according to ING. 

Trade Ideas 

The elections pose a risk to any dollar trades this week. It can be tricky to gauge the effect of political risks on the markets. 

In normal circumstances the recent jobs report would keep the USD supported. This week poses qualitative risks which are difficult to forecast. 

We expect equity markets to be influenced the most by election outcomes. Keep a close eye on risk sentiment resulting from equity related moves. 

A wait-and-see approach for USD trades would be best in our opinion. 

 Canadian Dollar 

What Happened Last Week 

The CAD was pressured last week despite the positive risk tone. A continued drop in Oil prices was the main driver. 

Over 15% of Canada’s exports come from Crude Oil. Any big deviations in oil prices can affect the CAD. 

Brent Crude and WTI has corrected sharply from the start of October. 

On Wednesday we had the release of CAD GDP MM for August. GDP MM came out firmer at 0.1% versus expectations of 0.0%. 

The slight beat on GDP was not enough to offer the CAD sustainable support. 

On Friday we also had the latest CAD employment data. Headline employment were higher than expected at 11.2K versus a 10.0k forecast. 

The more important full-time employment was the reason for the pickup. Full time employment came in at 33.9K jobs. 

Unemployment also dropped to 5.8% from 5.9%. This was mainly attributed to a drop in the participation rate. 

Overall the employment report was positive, but the CAD sold off. A drop in wage growth to 1.9% negated the positive employment numbers. 

Declining oil prices and wage growth put further pressure on the CAD on Friday. 

The Week Ahead 

The Canadian dollar has a very light economic calendar this week.  

A speech by Governor Poloz on Monday 5 November will be the only event of note. He is speaking on the “financial markets and implications for monetary policy“. 

Apart from that the calendar is very soft with no tier one data for the rest of the week. 

Trade Ideas 

Due to a soft calendar we expect oil prices and risk sentiment to be the CAD’s main drivers this week. 

As a commodity currency the CAD can is influenced by risk sentiment. Keep that in mind during the week with the US elections. 

Poloz was rather hawkish with the last BOC rate statement and press conference. Look out for Gov Poloz’s tone about the BOC’s rate path during his speech. 

Any hawkish or dovish comments by him can move the CAD. Make sure to consider oil prices and risk sentiment for any CAD trades this week.  

 Great British Pound 

What Happened Last Week 

The Pound started the week on the back foot. On Thursday morning it got a boost by Brexit developments. 

Reports said that the UK had reached a deal with Brussels on Financial Services. A UK official later said the news about a deal was “unsubstantiated“. 

The Pound had a bit of a whipsaw due to the conflicting news. On Thursday we had the BOE’s recent rate decision. 

The BOE kept rates unchanged as expected. It was with a unanimous vote of 9 to 0. 

According to the BOE Brexit remains the biggest concern for the BOE. 

The BOE lowered some economic forecasts. There was a downgrade in 2018 CPI to 2.3% from 2.5%. 

In the bigger scheme there was nothing new in the statement or press conference. Brexit uncertainty will keep the BOE on hold for the time being. 

The Week Ahead 

The Pound kicks of the week with Services PMI on Monday 5 November. 

Services contributes about 80% to the UK’s GDP. That is why Services PMI is the most important PMI measure to watch. 

The market is expecting Services PMI to slow to 53.3  

Danske Bank explains the Services PMI might slow more than markets are forecasting. Seeing that Manufacturing PMI had a big miss last week. 

From the chart we can see the big drop in the manufacturing PMI last week. This will put more focus on the Services release this week. 

On Friday we also have a first look at UK GDP releases for Q3. 

Markets are forecasting a climb in GDP QQ to 0.6% from 0.4%. Scotiabank explains that a read above 0.6% would be the strongest pace since late 2016. 

Expectations are for GDP YY to climb to 1.5% from 1.2%. Wells Fargo states the main contributor to higher GDP has been consumer spending. 

Their base case is for GDP YY to slow in Q4 to finish the year at 1.2%. This would be the “weakest annual pace of UK GDP growth since 2009”. 

Trade Ideas 

According to ING, Brexit continues to be the main driver for the Pound. 

Any big deviations in Services PMI will likely be a market mover. Given the importance of the Services sector to the UK economy. 

After last week’s slightly hawkish BOE meeting the GDP will be closely watched. 

Consumer spending will need to make up for a big drop in business investment. A big change from expectations will be market moving. 

The best-case scenario for a trade this week would be a miss on both the PMI and GDP data. According to ING, Brexit continues to be the main driver for the Pound. 

This means any trades on UK data releases needs to be in line with the current Brexit sentiment. The tone about Brexit seems to be changing daily so be careful and manage your risk. 

 Australian Dollar 

What Happened Last Week 

From Tuesday to Friday the AUD had a positive week. This was due to two main market drivers. 

The first was a lower CNY mid-point. The second was a recovery in Equity markets. 

On Wednesday we had the release of Q3 CPI data. AUD CPI YY came out as expected at 1.9%. The QQ numbers also came in as expected at 0.4%. 

The RBA’s preferred inflation measure is the Trimmed Mean CPI. This is more commonly known as Core CPI. 

Core CPI YY came in softer at 1.8% versus forecasts of 1.9%. Both the headline and Core numbers does not bode well for AUD CPI. 

The RBA has an inflation target band between 2% and 3%. This shows that headline and Core CPI is below the RBA’s target. 

Thursday’s Trade Balance data also supported the AUD. The data showed a $3.0B surplus versus an expected $1.7B. 

Commodity currencies were further boosted on Thursday due to a broad USD sell off. Positive comments from Pres Trump about a possible trade deal with China was another catalyst. 

The Week Ahead 

On Tuesday 6 November will be the next RBA rate decision and statement. 

Markets are widely expecting the RBA to remain on hold. At their last meeting the RBA said they were content with the recent weakness in the AUD. 

Westpac states that the RBA would stick to their positive forecasts. They also noted the RBA is likely to highlight that global risks are mounting. 

A lack of inflation has been a major factor in pushing back the next RBA rate hike. RBA comments on inflation is important after last week’s softer CPI data. 

According to ING, China trade data will also be in focus. They noted that markets are “concerned about downside risks to China export data”. 

China is Australia’s biggest export destination. A slowdown in China can greatly impact the Australian economy. 

Also, do not forget equities. The recent up and down moves in global stocks has put investors on edge. 

Further recovery or correction in equities can affect the commodity currencies. 

Trade Ideas 

Make sure to keep a close eye on US-China trade developments this week. Any positive or negative comments from the US or China can impact the AUD. 

The markets are expecting a neutral RBA this week. Take note of any comments about inflation. 

If they are dovish about CPI following the recent miss it could provide a sell opportunity. Take care to trade in line with the trade war sentiment in the market. 

Further drastic moves in equities can provide trade opportunities on the AUD as well. 

Positive risk tones should be AUD positive. While negative risk tones should be AUD negative. 

 New Zealand Dollar 

What Happened Last Week 

The NZD benefitted from the positive risk tone last week. As a commodity currency the NZD can be highly affected by risk sentiment. 

On Wednesday we had the recent NBNZ Business Outlook. The outlook came in close to prior at -37.1%. 

The market did not pay much attention to the outlook. All focus remained on the positive risk tone. 

The Week Ahead 

This week will be very important for the NZD. On Wednesday 7 November we will have the latest RBNZ rate decision. 

All focus will be on whether the RBNZ changes their dovish tone. In August the RBNZ pushed back its first expected rate hike into 2020. 

The reason for their dovish stance was weaker growth and business confidence. It’s important to note that recent data has been more upbeat. 

Recent GDP data for Q2 and CPI for Q3 both beat market expectations. Westpac expect this to provide a less dovish RBNZ this week. 

Westpac says the RBNZ will stick to their comment that the next rate move might be up or down.  

In our past two articles we noted that there is record short positioning on the NZD. It’s interesting to note this has not changed after the recent better data points.  

NZD net short positioning remains at historically low levels. 

Also keep track of the Equity space this week. Recent whipsaw moves are likely to continue. 

As a commodity currency risk sentiment affects the NZD. Strong moves in Equities can impact the Kiwi. 

Trade Ideas 

The focus for the NZD will be the RBNZ rate decision. Pay careful attention to the statement and press conference. 

We need to see whether recent data has changed the RBNZ’s dovish stance. If it did, we could see a short squeeze on the NZD. 

If the RBNZ remains dovish that would cause pressure on the NZD. 

Due to the short positioning a more hawkish tone might move markets more than a dovish one.  


What Happened Last Week 

The Euro had a choppy start to the week. This was due to both positive and negative factors. 

The S&P’s BBB rating of Italian debt had a positive market reaction. Negativity came from German Politics. Germany’s Merkel confirmed this is her last term as Chancellor. 

Further pressure came after softer GDP and sentiment data on Wednesday. GDP Flash YY came in softer at 1.7% versus expectations of 1.8%. 

GDP Flash QQ also missed at 0.2% versus a forecast of 0.4%. Euro Zone growth has been slowing from the start of 2018. 

The ECB has remained positive about EU growth despite soft data in 2018. Talking about growth he said the EU is “experiencing a weaker momentum but not a downturn”. 

All three sentiment indicators also missed expectations on Tuesday. Economic, Industrial and Services sentiments missed expectations. 

Sentiment is important as it can be forward looking. Weak sentiment shows businesses are negative about future economic conditions. 

The Euro remained weak after the data. On Wednesday we also saw the EUR CPI numbers for October. 

Headline CPI YY came in as expected at 2.2%. Core CPI beat estimates at 1.1% versus a forecast of 1.0%. 

The better numbers failed to give the EUR a lift. ING explained that  

Core CPI remains far away from the ECB’s 2% target. 

They also stated that the pickup in headline CPI was mainly due to higher energy costs. Where the Core number increase due to “an increase in package holiday prices”. 

At 1.1% Core CPI is far from the “vigorous” pickup expected by Mario Draghi. 

The Week Ahead 

The calendar for the Euro will be busy but light this week.  

Italian, German and US politics should be the main driver for the Euro this week. 

ING notes that the recent miss on Italian GDP should keep Rome and Brussels on a collision path. 

Danske Bank explains to look out for the German CDU leadership meeting on Monday 5 November. Any leadership announcements can impact the Euro. 

Trade Ideas 

With a light calendar the main Euro driver will be politics. 

Keep your audio squawk and news feed on to take advantage of any announcements. 

The markets are not clear on what to expect from the US mid-term elections. Make sure to manage your risk this week. 

Do not try and chase moves and understand the reasons for entering trades. 

 Japanese Yen 

What Happened Last Week 

The JPY started the week on the back foot. A positive risk tone saw safe haven outflows. 

Optimism from US Pres Trump caused a more positive sentiment. Trump was said to predict a great deal with China on trade. 

On Wednesday last week we had the latest BOJ rate decision. The BOJ remained on hold as expected. 

The BOJ cut Core CPI forecasts for 2018 to 2020. Lack of inflation has remained the biggest concern for Japan. 

According to Kuroda the overall inflation picture has not changed. He added that risks to the economic outlook and prices are skewed to the downside. 

Apart from those comments there was nothing new from the BOJ. As such the JPY’s main driver last week remained the risk tone. 

The Week Ahead 

The only event of note for Japan will be the Monetary Policy Meeting Minutes. This will be released on Monday 5 November. 

According to IHS, focus will be on further details about the “downside risks” to the economy. Comments about the BOJ’s response to further deterioration is also important. 

ING expects a lot of focus on the US mid-term elections this week. Also how it can affect the recent moves in US equities. 

They noted that the late cycle of the US should see further downside in US equities. 

Trade Ideas 

We do not expect a lot of moves from the BOJ minutes this week. 

All focus for the JPY should be on the US mid-term elections. 

As a safe haven currency the JPY should be affected by risk sentiment this week. 

We can expect the JPY to depreciate with risk on tones. If risk deteriorates, we can look for JPY to be supported. 

 Swiss Franc 

What Happened Last Week 

As a safe haven currency, the CHF had a negative start to the week. This was due to the broad increase in risk sentiment. 

For the remainder of the week the recent choppy price action in the CHF continued. 

The release of domestic inflation data on Thursday had a muted reaction. Both CPI YY and CPI MM came out as expected. 

The Week Ahead 

The only economic event for the CHF will be on Thursday 8 November. We will see the October Unemployment numbers. 

We do not expect this event to provide any fireworks for the CHF this week. 

ING explains that Italian budget concerns and US Equities will be the major focus for the CHF. 

Trade Ideas 

The CHF has had whipsaw moves the past couple of weeks. 

Given the lack of tier one data we expect risk sentiment to be the main driver for the CHF. 

The CHF should depreciate on negative risk tones. The CHF should appreciate due to positive risk sentiment. 

As seen in recent weeks the CHF is not as reactive to safe haven moves. Without clear catalysts we don’t see clear trade opportunities in CHF at the moment. 

Wrap Up 

There are a couple of key risk events to look out for this week.  

This includes RBA, RBNZ and FED rate decisions. 

In terms of politics there are a few to watch out for. Brexit, Italian budget concerns, US mid-term elections and German leadership developments. 

Also make sure to keep an eye on US Equities. Earnings reports and politics can cause big moves in the week ahead. 

Keeping an eye on the risk tone will be crucial. 

Make sure to have your news squawk on and ready to jump when the opportunity presents itself.   

Please feel free to leave your comments or questions below. 




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