Five on Friday: What Happened in Markets This Week

Lizzy Birmingham provides a brief roundup of the major FX moves this week, and the drivers behind each.

1) Euro Climbs Following Draghi’s Rate Hike Delay

On Thursday, the euro climbed 0.6%, reaching a seven-week high of $1.1290 against the USD.

This increase in value came following ECB President Mario Draghi’s announcement that the ECB would postpone an interest rate hike until at least the middle of next year in an effort to subdue mounting fears surrounding the next global recession.

Draghi also offered to pay banks that borrow cash from the ECB and lend it to households and firms, in order to pump more money into the struggling European economy.

“The prolonged presence of uncertainties related to geopolitical factors, the rising threat of protectionism and vulnerabilities in emerging markets is leaving its mark on economic sentiment,” Draghi said in a news conference on Thursday in Lithuania.

2) Rand Plunges Amidst Disappointing Performance Data

The South African dropped 3.7% this week, putting the currency on track for its worst week in eight months. On Friday, the rand traded at 15.12 against the USD, marking a 0.8% drop for the currency today alone.

The sudden tumble in the rands value has been attributed to the release of Treasury data on Tuesday, which showed that South Africa’s economy contracted 3.2% in the first quarter of 2019.

Financial Times quotes Piotr Matys, FX strategist at Rabobank, as saying: “The sell-off was triggered by significantly weaker gross domestic product data published earlier this week. The much sharper contraction in first quarter GDP reminded the market that President Ramaphosa and his administration face a tremendous challenge to address structural issues of the South African economy.”

Investors also have raised concern surrounding the independence of the South African Reserve Bank. Analysts at Commerzbank told the Financial Times: “Renewed debates about the central bank’s mandate and independence are also putting pressure on the rand. The events illustrate that the deep divisions within the ANC on this matter continue and constitute a continuous sword of Damocles for the South African currency.”

3) Yen Edges up on USD Following US Domestic Troubles

On Wednesday, the USD slid to a six-month low against the Japanese yen, down 0.15% at 108.30 yen.

Wednesday’s plunge came after a disappointing report Wednesday from payroll processing firm ADP and Moody’s Analytics found that private employers in the US added only 27,000 jobs in May, drastically below the 173,000 Dow Jones estimate. This weak data increased investor expectations of an interest rate rise.

Thursday did not fare any better for the USD, as the currency fell 0.16% to 108.286 yen.

Poor performance on Thursday came after the news spread of failed trade negotiations on Wednesday, where Mexican officials met with US negotiators concerning Donald Trump’s recently announced 5% tariff on all Mexican goods.

Shinichiro Kadota, senior strategist at Barclays in Tokyo, told Reuters: “The dollar had risen against the yen earlier on speculation that the US-Mexico negotiations would produce positive results, but headed back down on headlines saying an agreement had not been reached.”

4) Peso Plummets Following Rating Downgrade

The Mexican peso weakened as much as 1.3% on Wednesday, and continued its poor performance on Thursday, falling 0.6% against the dollar.

This comes after Fitch Ratings downgraded Mexico’s debt rating to BBB from BBB+, reaching almost “junk status”. In a press release on Wednesday, Fitch attributed attributed Mexico’s downgrade to “increased risk to the sovereign’s public finances from Pemex’s deteriorating credit profile together with ongoing weakness in the macroeconomic outlook,” namely trade tensions with the US.

On Wednesday, Moody’s Investors Service also changed its outlook for Mexico from stable to negative, citing similar concerns as Fitch Ratings in making their decision.

In a quote to Reuters, Mexico’s finance ministry criticised Fitch’s move, saying: “This action was taken on the sovereign debt of Mexico and that of Pemex even though the government has shown a total support for the company and is trying to find solutions for its structural and financial problems.”

5) Franc Rises with Global Volatility

The Swiss Franc continued its appreciation this week as worries surrounding Brexit and trade negotiations spurred investment in the “safe-haven” currency.

On Tuesday alone, the franc rose more than 0.5% against the euro to 1.112 francs per euro, marking the franc’s strongest performance since January 2017 and reaching levels at which the Swiss National Bank has traditionally intervened.

Reuters quotes Manuel Oliveri, a currency strategist at Credit Agricole in London, as saying: “While the Swiss franc has appreciated strongly in recent weeks, much of that gain is due to the wave of risk aversion sweeping across markets and we need to see further substantial gains before the central bank has to step in.”

Lizzy Birmingham

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