Weekly Review: Dollar Dives After Powell Strikes Softer, More Dovish Tone

Fittingly, the United States and China were in the spotlight last week with trade talk news and economic data driving the price action in the financial markets for much of the week. The Australian Dollar, New Zealand Dollar and Japanese Yen were fairly active despite extended holidays in each country.  The week began with weak manufacturing data from China and ended with a major reversal in tone from the leader of the U.S. Federal Reserve.

China

While the free world was busy shutting down in preparation of the New Year holiday, the Chinese National Bureau of Statistics said the country’s official Manufacturing Purchasing Managers’ Index (PMI) was 49.4 for December, missing analyst estimates of 49.9.

The data revealed that activity in China’s manufacturing sector contracted for the first time since February 2016 in the month of December. Traders blamed the contraction on a domestic economic slowdown and the on-going trade dispute between the United States and China.

Later in the week, this data was somewhat offset by another report from China which showed solid expansion in the services sector, which accounts for more than half of China’s economy. The Caixin/Markit Services Purchasing Managers’ Index (PMI) rose to a six-month high of 53.9 in December, up from 53.8 in the previous month.

Despite the solid data, total new order growth eased slightly, pointing to softening domestic demand. Official Services data released earlier suggested consumer demand and confidence have

On Friday, China jump-started the stock market rally when it confirmed it would hold vice-ministerial level trade talks with the United States in Beijing on January 7-8.

US Dollar

The U.S. Dollar whip-sawed against a basket of currencies last week before settling lower. Early in the week, the greenback was pressured by heightened stock market volatility, however, mid-week, it posted a dramatic reversal to the upside in response to a “flash crash” in Asia. On Friday, the index settled lower in response to stronger-than-expected U.S. jobs data and dovish remarks from Fed Chair Jerome Powell.

Economic data released on Thursday showed ISM Manufacturing PMI fell to 54.1 in December, lower than the 57.7 forecast and well-below the 59.3 previous read.

On Friday, the U.S. Dollar fell against the major currencies despite a sharp rise in U.S. Treasury yields after the Labor Department’s December jobs report showed the economy added a robust 312,000 jobs. This was much higher than the consensus forecast of 176,000 jobs. Wages also rose more than expected. Shortly thereafter, Federal Reserve Chairman Jerome Powell said the central bank will be more accommodative by exercising patience in raising rates, subduing fears of a hawkish Fed in 2019.

Japanese Yen

The Dollar/Yen was under pressure all week until Friday with the selling attributed to aggressive safe-haven buying and a plunge in U.S. Treasury yields amid fears that the economy was slowing down and the Fed may be making a policy error by tightening too fast.

The highlight of the week was a “flash crash” which drove the USD/JPY to 105.180, slightly above the March 26 bottom at 104.600. Traders blamed the move on extremely low holiday liquidity.

Australian Dollar and New Zealand Dollar

The Australian and New Zealand Dollars went on a roller-coaster ride before setting sharply higher for the week.

The Aussie and Kiwi were hit by a “Flash Crash” early Thursday with the Australian Dollar feeling the brunt of the selling pressure. According to Reuters, the Australian Dollar suffered some of the largest intra-day losses in its history amid a “drought of liquidity and a cascade of computerized sales.”

The daily chart showed that a one point the Australian Dollar was down 5 percent against the Japanese Yen and almost 4 percent versus the U.S. Dollar, before clawing back much of the losses as trading conditions calmed and humans intervened to stabilize the markets.

Both the AUD/USD and NZD/USD rallied on Friday to finish the week higher in response to Federal Reserve Chairman Jerome Powell’s dovish remarks on central bank policy.