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The forex trading week has come and gone. Time to take a look at the currencies and/or currency pairs that were on the move and what moved them. Were you able to profit from any of this week’s top movers?

Top Forex Weekly Movers (Jan. 4-8, 2016)
Top Forex Weekly Movers (Jan. 4-8, 2016)

Based on the above table, the main themes for this forex trading week were Aussie and Kiwi weakness to the safe-haven currencies, particularly the Japanese yen. Let’s see what was driving forex price action this week, shall we?

Global Equities Rout

  • Shanghai Composite (SSEC) down by 9.97% for the week
  • Japan’s Nikkei 225 (N225) is down by 7.02% for the week
  • Hong Kong’s Hang Seng (HSI) is down by 6.67% for the week
  • FTSEurofirst 300 (FTEU3) is down by 6.74% for the week
  • DAX (GDAXI) is down by 8.32% for the week  
  • DOW (DJI) is down by 6.19% for the week
  • S&P 500 (SPX) is down by 5.96% for the week

Global equities were in full retreat during the trading week, with Chinese equities leading the way. The Shanghai Composite index was down by a stunning 9.97% for the week after triggering China’s so-called circuit-breaker on two separate occasions, with the Thursday circuit-break being triggered after just 15 minutes of trading.

Oh, for those who are not familiar with the so-called circuit-breaker, it’s basically a set of rules and measures meant to stop panic selling. It was introduced back in December 2015 in the wake of the massive Chinese stock market meltdown of 2015, and was finally used for the first time this week. Anyhow, the circuit breaker was suspended and the peg on the yuan was raised, resulting in a slight recovery in sentiment during Friday’s Asian forex session.

That didn’t take away from the horrible performance in global equities, however. Hong Kong’s Hang Seng was down by 6.67% for the week, which is the worst weekly loss in four years. The pan-European FTSEurofirst 300 was down by 6.74% for the week, which is the heaviest weekly loss since August 2011. The DOW and S&P 500, meanwhile, were respectively down by 6.19% and 5.96% for the week. And both U.S. indices had the biggest ever start-of-the-year weekly drop in recorded history.

With risk aversion of historic, godzilla-like proportions (I’m exaggerating a bit, obviously) prevailing throughout the week, the higher-yielding currencies (AUD, NZD, CAD, GBP) were naturally and easily drowned by a torrent of capitals flows to the safe-haven currencies (JPY, CHF, USD). And the Aussie and the Kiwi were particularly vulnerable because of their close trade relations with China (to the point of being semi-dependent), with around 36% of Australian exports and about 20% of New Zealand’s total exports going to China.

Poor Chinese PMI Readings

  • Caixin/Markit mftg. PMI: 48.2 vs. 48.9 expected, 48.6 previous
  • Caixin/Markit services PMI: 50.2 vs. 52.3 expected, 51.2 previous

The prevailing risk-off sentiment ensured that the Kiwi and the Aussie were under constant pressure, but the charts also show that Aussie and Kiwi pairs spiked lower as a forex reaction to poor readings for China’s manufacturing and services PMI.

NZD/USD 1-hour Forex Chart
NZD/USD 1-hour Forex Chart
AUD/USD 1-hour Forex Chart
AUD/USD 1-hour Forex Chart

China’s manufacturing PMI printed a worse-than-expected reading, indicating that the manufacturing sector’s contraction got even worse. Commentary from the report states that “Total new work continues to fall, while new export work declines for first time in three months” due to “softer domestic and international demand.” Also, manufacturing companies continued downsizing their workforce, which is gonna be bad for an economy that’s trying to shift to a more consumer-driven model. Incidentally, Forex Gump mentioned in one of his recent write-ups that the poor manufacturing PMI reading was probably one of the catalysts that made sentiment on China turn sour.  

As for China’s services PMI, it’s just barely above the 50 neutral mark at 50.2, so the services sector is still expanding, albeit at the lowest in 17 months. The 50.2 reading is also the second lowest reading taken since the November 2005, and was a severe blow to forex traders because the consensus was that it was gonna print an increase over the previous month’s 51.2 reading.

Do you think these catalysts were enough to spark longer-term forex trends? Better keep these market themes in mind when planning your trades for next week!