A Look at the Currency Markets

As explained in an earlier article, this quarter will see a number of volatility in the financial markets. In many cases, the fourth quarter of the year is usually boring because of the decline in the number of market data. In addition, many people tend to spend more time with their families during the holiday season. However, this year things seem to be changing and a lot is being witnessed in the market. This week, the earning season began by a shocker in Wall Street. All the major banks except Citi that have already reported their earnings have missed on the analyst projections. Other companies have followed the same trend. Last month, the Federal Reserve surprised the financial market by sticking to the zero interest rates. Many investors had anticipated that the fed would tighten the monetary policy. This was based by the fact that the American economy is currently doing well, and the inflation targets have been met. To prevent the economy from growing at a very faster rate, the Federal Open Market Committee (FOMC) indicated that they would tighten by increasing the interest rates by 25 basis points. This did not happen.

United States Dollar ($)

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Us Dollar index 3 year chart Following the report by FOMC, the United States dollar has lost against all the major currencies except the Japanese Yen. This has also been followed by the release of weaker data. In September, consumer spending increased by just 0.1%. At the same time, the spending in August was revised to 0% from the earlier announced 0.2%. In addition, there was no growth in the retail sales apart from the autos and oil which realized marginal gains. Another pointer that the economy is not where a lift off is necessary is in the producer prices which fell by -0.5% which is the sharpest decline this year. A Redbook report released earlier indicated that the national chain store sales declined by 1.6% in September from August. In addition, the gasoline prices declined in September suggesting that CPI might be headed south. As a result, many investors believe that the fed might delay the lift-off to 2016. In fact, the Fed fund futures are now pricing their chance of a December hike at only 29%. Before the retail report, this number was 35% meaning more investors are wary. To make matters worse, the FOMC committee members are not certain about whether a lift-off is needed now. Mr. Evans, believes that while the current economic conditions are adequate for a hike, the inflation and consumer demand are not where they should. Therefore, he suggests that a March 2016 hike would be good. Lockhart, who is a vocal member of the committee and Stanley Fischer who is the chair believes the hike should be done this year.

Japanese Yen

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USDJPY daily chart In the past few months, the USD/JPY pair has been trading in an increasingly narrow range. This has increasingly led to a triangular pattern in the pair with many traders worried of a major breakout. Following the release of the weak retail sales, many expected that this breakout would be triggered. However, the concerns many people have is whether the breakout can be sustained going forward because the pair broke the symmetrical triangle pattern was broken. The main challenge for Japan is that its economy is growing at a choppy rate. Bank of Japan’s Kuroda has been under immense pressure to ease the monetary policy.

Euro


EURUSD daily chart   Euro has continued to gain against the US dollar. This week, the EURUSD pair touched a high of 1.14948. However, the Eurozone data has continued to disappoint. The Eurozone industrial production fell by 0.5% in August which was in line with the analyst forecasts. Therefore, it can easily be argued that the gain in EUR against the dollar is more extrapolated towards the dollar’s weakness. Many traders believe that the resistance of the pair is now priced at 1.1500. It is however important to note that a continuous rise in the euro leads to more problems in Europe which will ultimately lead to quantitative easing.

Pound

The biggest news this week was that AB Inbev had agreed to buy Sab Miller in a transaction worth $106 billion. The transaction will be done in pounds leading to a huge demand of the currency. In addition, the comments by the central bank governor that the wage growth was starting to improve further led to a gain in the pound. At the same time, the UK trade deficit widened from 10.0B to 11.1B which led to a decline in the currency. The New Zealand dollar (commonly known as Kiwi) has continued to perform well, rising by 2% against the US dollar. This follows recent comments by New Zealand Central Bank governor, Mr. Wheeler who commented that the economy was doing well and that further easing would be needed.

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NZDUSD daily chart The Australian dollar has also strengthened against the dollar. However, the main concern is that one of the biggest banks in Australia, Westpac was increasing its mortgage rate by 20 basis points.