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?
Five of the top ten movers are pound pairs, and all them showed that the pound was losing out, so you can pretty much conclude that pound weakness was the main theme this week. In addition, we’ve got Greenback weakness and demand for the Kiwi and the yen as secondary themes.
If it’s not very clear to you, below are some tables on how pound, Greenback, Kiwi dollar, and yen pairs fared during the trading week.
So, what was driving forex price action this week? Let’s dig right in, shall we?
GBP: Even More Brexit Polls
The pound’s downfall began during Tuesday’s late Asian/morning London session, as I highlighted on the chart above. What happened then? Well, we got the results of the latest ICM polls.
The first ICM poll was conducted via phone and it showed that the “leave” camp had a 3-point lead over the “remain” camp (45% leave vs. 42% remain, 13% undecided). The other poll was an online poll and it showed that the “leave” camp also had a 3-point advantage (47% leave vs. 44% remain, 9% undecided).
That’s bad enough, but if you can still remember last week’s Top Forex Market Movers, I pointed out then that ICM’s most recent online poll at the time revealed that the “leave” and “remain” camps were neck and neck, with 45% each, so the change in voting sentiment this week was all the more disappointing.
The results of the ICM polls weren’t the only ones released on that day since the results of the latest ORB survey were released as well, and it was unpleasant (for pound bulls) because the “remain” camp’s lead narrowed to only 9 points (51% remain vs. 42% leave, 7% undecided).That’s a significant slump from the previous ORB survey, which showed that the “remain” camp had a 20-point advantage (58% remain vs. 38% leave, 4% undecided).
We’re not done yet! Ipsos Mori also released a poll on the very same day. And it showed that two thirds of Britons are not buying into British Prime Minister David Cameron’s doom and gloom propaganda since they believe that a Brexit would not negatively affect their standard of living too much. Also, the same poll revealed that members of the “leave” camp were not likely to defect if told that they would lose up to £500 a year if a Brexit does occur.
These disappointing polls were apparently enough to spook some of the big players, which likely sustained the pound’s decline for the rest of the week.
And if you haven’t already, make sure to check out Forex Gump’s very helpful write-up here on how and where to get free and up-to-date information on Brexit-related polls, just in case Brexit-related polls continue to drive sentiment on the pound next week.
USD: May NFP Report
As y’all can see, Greenback pairs were actually flat at the start of the week before beginning to diverge during Tuesday’s U.S. session, so it’s probably safe to say that the price action of Greenback pairs were being dictated by opposing currency price action (i.e. traders weren’t paying attention to the Greenback).
Signs of uniform price action began to show during Thursday’s late U.S. session, probably because forex trades started hunkering down for the NFP report. Then, BAM! Greenback pairs were tossed lower across the board when the May NFP report was released. So, what happened then?
Well, Forex Gump already has a detailed write-up on that so go ahead and read that here. But to summarize, here are some bullet points that I, uh, “borrowed” directly from Forex Gump’s write-up.
- Average hourly earnings m/m: 0.2% as expected vs. 0.3% previous
- Average hourly earnings y/y: 2.5%, same pace as previous
- May non-farm payrolls: 38K vs. 163K expected, 123K previous
- April non-farm payrolls: downgraded to 123K vs. 160k originally
- March non-farm payrolls: downgraded to 186K vs. 208K originally
- Jobless rate: dropped to 4.7% vs. 4.9% expected, 5.0% previous
- Labor force participation rate: dropped from 62.8% to 62.6%
Wages grew at the expected rate, so forex traders quickly turned their eagle-like gaze to the actual NFP numbers and they deemed that it was unpleasant in their eyes, so lo and behold, as the tears of disappointed interest rate junkies transformed into a great deluge of sell orders that propelled my Greenback shorts into my target profit levels in less than two hours. Yeah, I was short-term bearish on the Greenback after reading up on Forex Gump’s Forex Preview for the May NFP Report.
Going back to the NFP numbers, the net increase in May was only 38K, which is really far from the expected net increase of 163K. More than that, it was below the 100K floor, which is the minimum number of jobs to be generated each month in order to cover new entrants, as defined By Fed Chair Janet Yellen in a statement she made back in December.
And since the NFP reading was below the 100K floor, then there may be some underlying problem in the U.S. economy, which likely snuffed expectations of a June rate hike while making a July rate hike harder to justify.
True, the jobless rate did drop to 4.7%, which is the lowest reading ever since August 2007, but this was mostly due to the massive exodus of 664K workers who left the labor force, which pulled the labor force participation rate down to 62.6% and the jobless rate with it. And an exodus of workers once again points to a possible underlying problem in the U.S. economy, which is why the reaction to the dismally mixed NFP report was very violent.
Oh, as Forex Gump pointed out in his write-up, Fed Chair Yellen will be talking about her outlook on the U.S. economy on Monday (June 6, 4:30 pm GMT), so watch out for that one since we may potentially see more sparks from Greenback pairs, especially if Yellen switches from her somewhat hawkish tone, as we observed during the May 27 Harvard interview, to a more dovish one.
JPY: Tax Hike Delay & The U.S. NFP Report
The yen’s path to intraweek greatness started on Tuesday when risk aversion started to creep back in, thanks apparently to weaker-than-expected U.S. economic data and renewed Brexit concerns after Brexit-related polls began to show that voting sentiment was now skewed to the “leave” camp, which I already talked about earlier.
However, it wasn’t until Wednesday rolled around that the yen really got a bullish boost, and yen bulls can thank Japanese Prime Minister Shinzo Abe for that because he announced that the controversial sales tax hike will be delayed to October 2019.
Okay, but why did the yen gain strength on that event? Well, forex traders have been shorting or avoiding the yen in the past couple of weeks because Japan will supposedly face credit rating downgrades if Abe decides to delay the sales tax hike.
And as it turns out, Abe did decide to delay the sales tax hike, but the credit rating downgrades did not come. In fact, some credit rating agencies (or their top officers at least) are now beginning to support Abe’s decision. For example, Kim Eng Tan, S&P’s senior director of sovereign rating in the Asia-Pacific region, told Reuters that Abe’s decision makes “some sense” since implementing the sales tax hike would weaken domestic consumer spending, which would then weaken the Japanese economy as a whole.
The lack of immediate action from credit rating agencies likely prompted forex traders who shorted the yen in anticipation of a sales tax hike delay to bail out of their positions. At the same, it probably signalled to yen bulls that it’s okay to load up on the yen as a safe-haven yet again.
The yen then steadily kept on gaining buyers after that, thanks to uncertainty over the ECB and the OPEC press conferences, before getting a surge of buyers across the board on Friday when the NFP report came in as a disappointment, as I already discussed earlier. As to why the yen got a lot of buyers on Friday, that was very likely due to safe-haven flows since the dismal NFP report put some pressure on U.S. equities. It even caused European equity indices to turn red after being in the green during the morning London session.
NZD: Lower Rate Cut Expectations (?)
Market analysts aren’t talking about it much, but the Kiwi reigned supreme, even against the mighty yen (during this trading week at least). And as you can see on the chart above and as I noted in my recap for Tuesday’s morning London session, the Kiwi (and the Aussie) started climbing across the board during Tuesday’s morning London session, which is kinda weird because risk aversion was the dominant sentiment at the time.
I attributed the Kiwi’s strength back then to wonky price action due to month-end capital flows as mutual funds, pension funds, hedge funds, and other large players rebalance their positions and/or take some profits off the table for cash disbursements. Although I also pointed out that European forex traders were likely pricing in the earlier positive report for New Zealand, specifically ANZ’s latest business outlook survey, which showed that a net 11.3% of businesses surveyed (6.2% previous) were optimistic on New Zealand’s economy and their own business prospects in the coming year.
I can’t say with confidence that this is indeed the prime catalyst for the Kiwi’s week-long strength, but other market analysts are saying that it is, since the jump in business confidence to a four-month high of 11.3% was apparently enough to lower the probability of a rate cut from the RBNZ next week to less than 25%.
Do you think these market themes and events were enough to spark longer-term forex trends? Better keep them in mind when planning your trades for next week!