With a holiday in Japan on Monday and Thanksgiving in the US at the end of the week, this past week was expected to be uneventful. However, the combination of low volume and surprising news led to major volatility in the currency markets. The week began with Gold heading higher, again with no real news, and this caused weakness to accumulate in the dollar. As a result, the USD hit 2009 lows against the EUR and CHF (which traded below parity : 1.000), and the Dollar Index traded to 15 month lows. With the momentum piling against the dollar, many market analysts stated that the only thing that could assist the dollar at this point was a return to economic weakness and an equity selloff.
From Forex analysts' mouths to G-d's ears, on Thursday the dollar made an abrupt u-turn as global markets plunged on comments that Dubai World, Dubai's main development company was asking its creditors for a six month reprieve on payback of its $60 billion in debt. As a result, the EURUSD which had hit 1.5190 earlier dropped close to around 1.4900. Also, global equity markets were down 4-6% on the news.
Looking ahead the mother of all news announcements, Non Farm Payrolls is due out on Friday. After this past week's much better than expected Initial Claims number, Forex traders will probably be expecting better than expected results. Therefore, if employment numbers throughout the week are worse than expected, we could see volatile moves in the dollar. Along with the economic news, at Go Forex, we also expect moves in the dollar this week to be influenced by any new announcements from Dubai and its effects.
The EURUSD hit a new 2009 high this week at 1.5140 and seemed poised to continue to capitalize on dollar weakness. However, with the news in Dubai, it quickly lost its footing and fell hard. What it is revealed from this trading action, is that Forex traders continue to view the Euro as a play on economic growth, and attribute very little safe haven status to the currency. This is occurring even as employment and debt trends are improving at a faster rate than the US. Looking ahead, the ECB will be meeting on Thursday to set their interest rate policy. No change is expected, but Forex traders will be analyzing the central bank's statement and ECB President Trichet's press conference for hints towards future interest rate hikes. At Go Forex, we believe that the ECB will use the events in Dubai as an example of why it is too early to raise rates, and emphasis will be given on the need to limit government debt levels.
The pound underperformed most majors this past week as sentiment towards the UK's economic revival has been tempered. Economically, revised GDP met expectations, but a weak stock offering at Lloyds Bank showed that investors are still worried that the credit turmoil isn't behind us. As a result, the EURGBP traded back above 0.9100 and the GBPUSD hit lows of 1.6273. This week, Manufacturing and Services PMI will be released. However, Forex traders will probably be more interested in watching the continued reaction of credit markets, and more importantly credit liquidity, in the wake of the Dubai World debt news.
Japan began the week on holiday, but that didn't limit the yen from staging a massive rally this week. The yen strengthened against the dollar the entire week. Initially it benefitted from overall dollar weakness, and then rallied further as the Dubai news caused investors to leap into safe havens. Also, late Thursday night, Japanese Retail Sales were better than expected. As a result, the USDJPY hit lows of 84.81 and the Yen was at an amazing 14 year high against the dollar. With the yen strength, Forex traders and analysts are now speculating that the Bank of Japan will intervene to weaken their currency. So far, Japan has denied rumors of potential intervention, but it is expected to be hotly debated by government officials in the coming week.