Weekly FX outlook Feb 12-16

Please note, that this article's date is February 11 and it is a part of weekly analysis for my subscribers.

This past week trading was nervous and volatile at all of the financial markets. Main topic was a dramatic sell-off in U.S. equities, with S&P 500 Index losing almost 10% of its’ peak value. Despite the absence of major economic data releases from U.S., Treasuries continued the slide and 2-Year yields breached 2.8%. This sharp increase in borrowings cost weighs on confidence of homeowners, consumers and businesses, creating uncertainty whether the economy will be able to overcome the end of cheap funds period. As majority of Central Banks worldwide are heading to tightening cycles, we could see a further decline in demand for bonds. At the same time, the biggest question for now is about how deep will stock indices decline further? Have they already found the bottom, or will this technical correction turn into a long-term bearish market?

I bet, there is no analyst or economist in the world, who can answer this question. Some of them say, that it’s a perfect time to buy equities on the long-term basis, as prices eased from peaks and became more attractive. Anyway, there should be a consolidation period before bullish rally, with possible whipsaws on the bearish side and investors have to be convinced by a several weeks recovery before they will put higher stakes on the table.

The best currency to hide from such turmoil is Japanese Yen, as the concerns do not come from Asia. USD/JPY has always been a risk-appetite indicator and safe-haven asset, but the main profits last week came from yen crosses versus weaker currencies, like AUD and GBP. Australian dollar’s correction extended in the beginning of the past week as Retail Sales report disappointed investors. AUD/USD was down 1.05% and AUD/JPY lost 2.53% on weekly basis. But as AUD/USD buyers stepped in on Friday trading, and the pair found a local support on Daily timeframe, AUD/JPY continued to slide. In case if the uncertainty will continue to weigh next week, aussie-yen cross would keep declining further. Daily charts below. Nearest supports: AUD/USD 0.73357, AUD/JPY