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FX Calm Amid Broader Market Carnage; Dollar, Yen and Bitcoin Benefit

During a week which saw global equity markets suffer their largest losses in two years and broader market volatility pick up, foreign exchange markets were surprisingly calm. A flight to safety benefitted the US dollar, which finished higher against a basket of currencies for the second consecutive week; and the Japanese yen, which at one point on Friday threatened the major technical level of 108 per dollar. Meanwhile, bitcoin appeared to find a bottom at $6,000.

Traders piled into dollars during the Dow Jones’ 1300-point fall last week (the index was down more than 2,000 points on both Wednesday and Friday) as the relative safety of the US currency outweighed a downward revision to US interest rate expectations. The dollar’s long-term prospects appear to have taken a turn for the worse after derivatives markets repriced to suggest only 2.3 US rate hikes this year, down from 2.8 hikes a week earlier.

Going forward, the dollar will suffer on the back of strength in the global economy, thinks founder of Exante Data, Jens Nordvig.

In reference to EUR/USD – the world’s most actively traded dollar pair – Nordvig told CNBC reporters on Monday that “dips should be used to add to long exposure [to add short dollar exposure].”

EUR/USD tested as low as 1.22 on Friday before a bout of dollar profit-taking drove the price back up to 1.225 for a loss on the week of 1.7%.

The US Dollar Index climbed 1.3% and back through 90.0 (to 90.32) and has now made back nearly half of January’s losses. In January, a 3% decline marked the index’s worst monthly performance in two years.

Dollar traders can look forward to the release of January’s US inflation data on Wednesday. Headline inflation, which fell sharply and missed forecasts in December, is expected to pick up to 0.3% from 0.1%.

Given the turmoil in equity markets, it was inevitable that the dollar would suffer against the yen – the FX world’s premier safe haven. USD/JPY fell at one stage to test the major support level of 108, from which the market bounced to end the week at 108.77, down 1.2%. A clean break of the level in the days or weeks ahead will be highly significant for USD/JPY which, barring one failed breakout in September, has been range-bound between 108 and 114.5-115.0 since early 2017. Sub-108 prices will perhaps surprise the team at UBS, who predicted in December that the dollar would do best this year against the yen.

Sterling investors were unnerved on Friday when the EU’s chief Brexit negotiator, Michel Barnier, warned that a transitional deal between the EU and the UK was “not a given,” as some investors had come to believe.

“Our partners [British negotiators] have set out a number of disagreements which I see as substantial. To be frank, if these disagreements persist, transition is not a given,” said Barnier at a press conference in Brussels.

GBP/USD fell in response to Barnier’s comments from levels close to 1.40 to 1.3765, before settling for the week down 2% at 1.3825.

Like the US, the UK will release important inflation data next week. However, unlike the US, the UK is set to announce a fall in consumer prices according to economist forecasts. A fall for January of 0.6%, as predicted, would mark only the fourth time since the UK’s vote to leave the European Union in June 2016 that British consumer prices have fallen.

After tumbling to $6,000 on Tuesday – 70% below December’s high of $19,900 – bitcoin ended the week marginally higher at $8,664.

Bitcoin’s rise amid a stampede away from risky assets appears at first to be wildly paradoxical given its notorious volatility, but the move in fact supports claims that cryptocurrencies are an asset class of their own, independent of any individual country or company, which can therefore act as a haven during difficult times for the broader market.

Stakeholders in cryptocurrency exchanges continue to do their best to entice investors into buying bitcoin. One such stakeholder, Thomas Glucksmann, head of business development at Gatecoin, did so by saying midweek that there is “no reason why we couldn’t see bitcoin pushing $50,000 by December.” As reasons for his extreme optimism, Glucksmann cited better regulation, such as that introduced recently in South Korea, as well as technological developments and the entrance of institutional capital into the market.

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