Risk Aversion Could Lead to Dollar Buying
Forex markets were looking for a catalyst for movement in the early parts of last week but without any major economic releases on the docket it seemed as though we would be experience some major fall-offs in price volatility. To some extent, this was the case. But given the strength of recent trends and several risk events contributing to the underlying sentiment that is becoming visible in the forex markets, it was not totally surprising to see some of the reversals that were in place toward the end of last week.
Early moves were dictated by the increasingly troubling economic data that has been coming out of China, with the country recently releasing one of its worst monthly trade balance reports on record. The major changes could partially be accounted for because of the Chinese New Year holiday but many analysts have started to question the true underlying strength of Chinese growth rates. It is entirely possible that annual GDP figures are not actually in the mid-7% range and if this is the case we could start to see downside revisions in the consensus expectations for global GDP growth this year.
It will be important for forex traders to monitor developments in these areas in the coming months, as this could be one of the central drivers of currency prices throughout the rest of the year. Any indication that the global economy is not actually on a strong footing could lead to panic selling in a variety of currencies and bring new strength to safe haven assets. Some of the best bullish candidates in this type of scenario would be the US Dollar, Japanese Yen (as carry trades start to unwind), and the market neutral Swiss Franc.
The Week Ahead in Forex Markets: Watch for Risk Aversion Catalysts
In the week ahead, traders will need to watch for any new indications that risk aversion is likely to set into the markets. In addition to the Chinese data, we could also see negative influences stemming from the lack of political progress that is being seen in the Ukraine. We are currently seeing some very elevated levels in currencies like the Euro, so it would not take much to generate some major reversals if forex traders start to feel the need to flock to safety.
There is also the possibility of contagion effect in the Eurozone economy, so the situation in Ukraine will be critical in determining the level of confidence we will see in forex markets in the next few weeks. Any escalation or hinting at potential military conflicts could quickly result in a sell-off in the Euro and prevent the EUR/USD from breaching the 1.40 barrier. So this is another area that will need to be watched, given the lack of economic data reports that will likely be able to drive overall sentiment in the coming week.