Get ready for more volatility

This past 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 barreled 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 last week was triggered by the GameStop frenzy and now that market participants no longer see a one way rally, currency traders should get ready to face more volatility.

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 2 months. Typically, JPY is driven higher in market corrections but unwinding of short USD bets was the leading driver of currency flows.

US data hasn’t been terrible and Fed Chair Powell confirmed that it was “too early to focus on tapering dates.” Friday’s personal income, personal spending and Chicago PMI numbers surprised to the upside.

This week, the US 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 are positive for the USD.

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 CAD.

Meanwhile it is not often that we see divergences in the Australian and New Zealand currencies, 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.

EUR 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. There seems more evidence of the Eurozone doing better than economists feared. This week we’ll get a look at how the Eurozone as a whole performed. GBP stabilized with no major economic reports.

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