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Forex Roller Coaster Ride Tied to Demand for Risk

By:
James Hyerczyk

Last week’s activity in the Forex markets featured a couple of key events that kept traders on their toes. Both were in the geopolitical arena since fresh

risk-bulls-and-bears

Last week’s activity in the Forex markets featured a couple of key events that kept traders on their toes. Both were in the geopolitical arena since fresh economic data was relatively scarce during the last week of the month. The first key event was OPEC’s plan to make output cuts later in the year. The second was concerns over the financial health of Deutsche Bank. Both events had a major impact on investor sentiment and demand for risky assets.

On Wednesday, September 28, OPEC agreed to modest output cuts in a last minute decision at informal talks in Algiers. It was the first such deal since 2008. The decision caught investors by surprise, creating tremendous volatility in the energy sector and currency markets.

“OPEC mad an exceptional decision today…After two and a half years, OPEC reached consensus to manage the market,” said Iranian Oil Minister Bijan Zanganeh, who had repeatedly clashed with Saudi Arabia during the previous meetings.

The deal calls for OPEC and the other major producers to reduce output to a range of 32.5-33.0 million barrels per day. OPEC estimates its current output at 33.24 million bpd.

The news was well-received by risk-takers who drove up commodity-linked currencies.

The other big story last week involved Deutsche Bank. Shares of the bank were under pressure mid-week, hitting all-time lows on Friday, on mounting concerns about the survival of the major German lender after the U.S. Department of Justice slapped it with a $14 billion fine.

The news encouraged investors to take risk off, driving down demand for higher-yielding assets and commodity-linked currencies. Investors became particularly concerned when hedge funds started to pull money and positions out of the bank.

By the end of the week, however, shares of the bank had recovered and investors chased risk again on reports the bank had reached a settlement agreement with the U.S. DOJ.

AUD/USD

The AUD/USD posted three substantial price swings in reaction to the volatile changes in investor sentiment before settling at .7656, up 0.0035 or +0.46%. There were no major domestic events last week. Demand for risk drove the market higher after OPEC’s decision. Sellers hit the Aussie hard after the initial news over Deutsche Bank broke, but the currency was able to recover most of that loss on news of the settlement.

NZD/USD

The New Zealand Dollar bottomed early in the week shortly after the release of a Trade Balance report that showed the deficit ballooned to -1265M from -730M. From there, the trade featured the same up and down movement as the AUD/USD as investors posted a two-sided trade in reaction to rapid shifts in risk sentiment. The NZD/USD finished the week at .7281, up 0.0040 or +0.56%.

USD/JPY

The Japanese Yen started out lower, but bottomed early in the week when the OPEC decision was released. Greater demand for risky assets softened the need to use the Yen as a safe haven investment. This helped the USD/JPY close higher for the week at 101.318, up 0.347 or +0.34%.

In other news, Bank of Japan Governor Haruhiko Kuroda said the central bank will pursue the most appropriate yield curve to achieve its 2 percent inflation target. He also said the BOJ is ready to ease policy further by cutting its short- and long-term interest rate targets, or expanding risky asset purchases. He also added that if necessary, the central bank can also choose to expand the monetary base faster.

About the Author

James is a Florida-based technical analyst, market researcher, educator and trader with 35+ years of experience. He is an expert in the area of patterns, price and time analysis as it applies to futures, Forex, and stocks.

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