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?
Looking at the list above, it’s pretty obvious that the main theme for this trading week was Aussie domination, with euro and Swissy weakness as well as Kiwi strength as minor themes. So, what drove forex price action? Let’s take a look, shall we?
Strong Appetite For Risk During The Week
- Pan-European FTSEurofirst 300 (FTEU3) up by 3.24% for the week
- Dow Jones Industrial Average (DJI) up by 3.25% for the week
- S&P 500 (SPX) up by 3.17% for the week
- Nasdaq Composite (IXIC) up by 3.47% for the week
- Australia’s S&P/ASX 200 (AXJO) up by 3.90% for the week
- Japan’s Nikkei 225 (N225) up by 1.42% for the week
There was a LOT of risk-taking during the trading week, especially in the global equities market. The S&P 500, for example, had the best week in almost a year while European equities had the best performance in a month. Lots of causes for the strong broad-based risk appetite were being cited by market analysts; from ECB Draghi’s pledge to boost inflation to the FOMC minutes being a vote of confidence on the US economy, and even last Friday’s attack on Paris having limited impact on the global economy.
That’s great and all, but what does all that have to do with the forex market, you ask? Well, if you’re asking that, then you may need to check out our School’s lessons on Forex and Global Equities Market and Fundamental Factors That Affect Currency Values, as well as our lesson on Carry Trades.
The gist of it all, though, is that the forex market isn’t a closed system. In this case, the prevalence of risk appetite during the trading week generated capital flows into higher-yielding currencies such as the Aussie and the Kiwi at the expense of safe-havens like the Swiss franc and lower-yielding currencies like the euro.
However, this begs the question as to why forex traders favored the Aussie over the Kiwi given that both currencies are higher-yielders. Heck, the Aussie even shrugged off the fact that iron ores (a major Australian commodity export) were down to US$45.44 as of November 20, which is nauseatingly close to the 10-year low of US$44.59.
Well, the most likely answer to that was the release of…
The RBA Meeting Minutes
- Pass-through of lower Aussie will apply inflationary pressure “over the next several years”
- Lower Aussie had a “sizable contribution to growth from net service exports”
- Lower Aussie will help to promote an increase in non-mining business investment
- Aussie dollar “was adjusting to the significant declines in key commodity prices”
- Lower Aussie “boosting demand for domestic production”
- “moderate economic expansion had continued”
- Growth in the Australian economy expected “to strengthen gradually over the next two years”
After reading through those bullet points above (full RBA meeting minutes here), you probably concluded that the RBA is no longer dovish and even sounded rather upbeat. We’ll, you’re not the only one since market analysts have pointed out that expectations of a December RBA rate cut have dropped to just 8% after the meeting minutes came out.
In contrast, many market analysts are still calling for another RBNZ rate cut given the RBNZ’s recent statement that “some further reduction in the OCR seems likely.” Also, Tuesday’s dairy auction printed a 7.9% drop in the GDT price index, marking the third consecutive auction with a negative outcome. That in itself probably dampened demand for the Kiwi, but y’all should also note that the decline in dairy prices was one of the major risk factors to New Zealand’s economy cited by the RBNZ in their November Financial Stability Report.
Major Technical Breakouts On Aussie Pairs
Aside from the fundamentals driving demand for the Aussie, major technical breakouts on almost all Aussie pairs were also probably drawing-in a lot of buyers. Just take a look at the 4-hour forex charts for EUR/AUD and GBP/AUD below:
Bonus: FOMC Minutes
If you want the details of the FOMC minutes, then Forex Gump is your FX-Man, so go ahead and check out his write-up here. But if you want it short and sweet, then just know that Fed officials were pretty hawkish and a December rate hike is now apparently a very real probability.
However, many market analysts have opined that a December rate hike has already been priced-in by the market. Forex Gump also expressed the same view in his write-up. And the Greenback’s initial reaction to the FOMC minutes even seems to confirm this. Nevertheless, the Greenback was able to score brownie points against most of its forex rivals during the trading week, with the Aussie and the Kiwi as the only exception.
I have to admit, however, that the US dollar was only able to end on a mostly positive note due to strong Greenback demand before the release of the FOMC minutes, so the jury on whether or not a December rate hike has been fully priced-in is still out.
But in the Aussie’s case, the FOMC minutes was apparently interpreted by equity traders as a vote of confidence on the US economy and sparked even more risk-taking, according to analysis from The Wall Street Journal. And the combination of risk appetite and the Greenback’s softness ultimately allowed the Aussie to give the Greenback a comeuppance.
Do you think these catalysts were enough to spark longer-term forex trends or did they just cause a knee-jerk reaction? Better keep these market themes in mind when planning your trades for next week!