3 Questions That Put Last Week's Forex Rallies At Risk

Unless you’ve been busy binge-watching Making a Murderer episodes, then you should know that high-yielding currencies have caught a breather from their forex losses last week. Are we seeing a bottom for risk-friendly investments or just a dead cat bounce?

Let’s take a look at three questions that could easily set the high-yielders back on their bearish paths:

1. How’s the oil oversupply situation?

The Black Crack was one of the biggest gainers last week after falling by almost 17% in January. WTI futures capped the week 9.41% higher while Brent crude oil prices clocked in a 12.71% gain. Problem is, the main reasons for its recent decline haven’t really gone away.

Iran’s Oil Minister Bijan Zanganeh recently said that they can immediately sell 500,000 barrels per day and could even bump daily production up to 1,000,000 barrels by the end of the year. This won’t help the oversupply situation, especially since authorities like the IEA and OPEC have already downgraded their demand forecasts for 2016. On top of that, China’s economic slowdown is still weighing on global market activity and could further lessen the demand for commodity.

2. Will this week’s policy statements hint at more easing?

One thing that’s common about last week’s BOC and ECB’s statements is that both central banks are worried over inflation. And with the impact of low oil prices still kicking in, it won’t be a surprise if the Fed, BOJ, and RBNZ talk about consumer prices, too.

The Fed isn’t expected to make any changes to its policies though all eyes will likely scan its statement for any signs that the weak inflation is delaying the Fed’s rate hike schedule. Heck, last Friday Uncle Sam’s headline and core CPI numbers had already missed their estimates!

The RBNZ is also expected to stay pat after cutting rates just last month. Instead, traders will watch out for any changes in the bank’s policy biases since oil and dairy prices have fallen significantly since its last meeting.

Last but not the least is the BOJ, which is expected to either jawbone or introduce more stimulus into the economy. Though market players have so far reacted positively to the thought of more easy money from the BOJ, the weight of dovishness from ALL three central banks could drag on risk sentiment.

3. Were last week’s moves just “corrections” to longer-term trends?

Market bees are buzzing with the idea that last week’s rallies are just corrections to existing long-term trends. After all, the bears have been at it since the start of the year and hasn’t let up since.

The combination of China’s relatively calmer markets, the idea of more easy money from the ECB, and an uptick in oil prices seemed like a good place to take profits from short trades. And all ahead of the FOMC statement, too! But are we really seeing a bottom for high-yielding currencies or are we looking at a dead cat bounce?

Fundamentally there’s no significant change in existing market themes. Major central banks are still struggling to stimulate economic activity while China is still facing an economic slowdown that will continue to weigh on global market demand. It won’t take much for forex traders to go back to their selling ways if disappointing reports like last Friday’s euro zone PMIs and the U.K.’s retail sales continue to pepper the newswires.