Top Forex Market Movers of the Week (Aug. 15-19, 2016)

The forex trading week has come and gone. Were you able to profit from any of last week’s top movers?

Top Forex Weekly Movers (Aug. 15-19, 2016)

Top Forex Weekly Movers (Aug. 15-19, 2016)

Looking at the table above, 5 out of the top 10 movers are Aussie pairs, with the other 5 being Greenback pairs. Also, the table shows that both currencies got whupped. It’s therefore probably safe to say that the main themes this week were Aussie and Greenback weakness. Okay, time to take a look at what was driving price action.

AUD

AUD/USD: 1-Hour Forex Chart

AUD/USD: 1-Hour Forex Chart

AUD Pairs Ranked (Aug. 15-19, 2016)

AUD Pairs Ranked (Aug. 15-19, 2016)

The Aussie was the worst-performing currency of the week. And as I highlighted on the chart above, the Aussie got bushwhacked on two separate occasions.

The first round of weakness was very likely due to the RBA meeting minutes. Lower demand for higher-yielding currencies like the Aussie due to risk aversion at the time may have been a factor as well. But given that the Aussie lost out to the Kiwi, another high-yielding currency, the RBA meeting minutes was the more likely culprit.

AUD/NZD: 1-Hour Forex Chart

AUD/NZD: 1-Hour Forex Chart

As for the specifics, the minutes didn’t explicitly provide any forward guidance. But they did slightly tweak their statement on interest rates.

This is from the July meeting minutes (emphasis mine):

Low interest rates were continuing to support household spending and the lower exchange rate since 2013 had continued to assist the traded sector of the economy”

While this is from the August meeting minutes (emphasis mine):

Low interest rates and the depreciation of the Australian dollar since 2013 were expected to continue to support the necessary adjustments in the economy.”

The implication for that little tweak is that the RBA still has an easing bias. And as usual, the RBA also tried to talk down the Aussie, saying that “an appreciating exchange rate could complicate” the adjustments in the economy.

Another point worth, er, pointing out is that the RBA is expecting Australia’s Q2 GDP growth to be “more modest” relative to Q1’s solid reading. And that, as well as expectations of persistently low inflation, give the RBA meeting minutes a slightly dovish vibe.

Moving on, the Aussie stabilized ahead of and later shot up when Australia printed solid employment numbers. However, there was no follow-through buying (and lots of follow-through selling) likely because the details of the jobs report were not as stellar as the headline numbers. Also, Moody’s slashed its outlook on Australia’s top banks from stable to negative. And the Aussie’s slump only accelerated on Friday when Moody’s warned that it may also cut the credit rating of Australia’s top banks, and not just their outlook.

Overall, a pretty bad week for the Aussie, so much so that the rise in iron ore prices during the week was not able to provide the Aussie with any support.

USD

USD/JPY: 1-Hour Forex Chart

USD/JPY: 1-Hour Forex Chart

USD Pairs Ranked (Aug. 15-19, 2016)

USD Pairs Ranked (Aug. 15-19, 2016)

Strangely enough, the Greenback’s downfall started with a broad-based slide during Tuesday’s Asian session. It’s strange because there were no direct catalysts at the time. Although the U.S. did print disappointing CPI numbers, but that was during the U.S. session, which was several hours before. Also, the Greenback traded mostly sideways when the CPI report was released.

The Greenback stabilized a bit when a couple of Fed officials delivered some rather hawkish rhetoric during Tuesday’s U.S. session. New York Fed President Dudley’s comment about a September rate hike being “possible” is especially noteworthy.

Still, the Greenback got another round of beating near the end of Wednesday’s Asian session. There was also no direct catalyst for this down move. However, it’s possible that forex traders were opening preemptive positions ahead of the July FOMC meeting minutes, given that the July FOMC statement was a disappointment.

And as it turns out, the July FOMC meeting minutes turned out to be a disappointment as well. Forex Gump has a write-up on the key highlights here. But the key statement that likely drove the Greenback lower was this:

“Members generally agreed that, before taking another step in removing monetary accommodation, it was prudent to accumulate more data in order to gauge the underlying momentum in the labor market and economic activity.”

In simpler terms, the Fed is in wait-and-see mode, which is not exactly supportive of rate hike expectations, especially since there are only three FOMC meetings left for this year.

The Greenback recovered a bit on Friday. Like the other week, this was likely due to profit-taking by the shorts. But unlike last week, there is a higher chance of actual Greenback demand because of another round of hawkish rhetoric from Fed officials, namely from Dudley (yet again) and San Francisco Fed President John Williams.

The Other Currencies

Okay, here is how the other currencies fared this week:

CHF & EUR

CHF Pairs Ranked (Aug. 15-19, 2016)

CHF Pairs Ranked (Aug. 15-19, 2016)

EUR Pairs Ranked (Aug. 15-19, 2016)

EUR Pairs Ranked (Aug. 15-19, 2016)

I lumped the euro and the Swissy together because their price actions seems related (at least during this trading week). And what was tying them together, you ask? Well, safe-haven flows that’s what.

Equities are generally considered risky assets, so the performance of equity indices act as an indicator of overall risk sentiment. And as you can see below, risk aversion was the dominant sentiment, at least in Europe.

  • FTSEurofirst 300 (FTEU3) closed 1.70% lower to 1,339.75 for the week
  • Euro Stoxx (STOXX50E) closed 2.45% lower to 2,970.33 for the week
  • FTSE 100 (FTSE) closed 0.83% lower to 6,858.95 for the week
  • DAX (GDAXI) closed 1.58% lower to 10,544.36 for the week

As a safe-haven currency, the Swissy naturally got some much needed loving. And that’s probably the only thing that’s drove the Swissy higher, since price action on most Swissy pairs was actually kinda messy.

CHF Pairs: 1-Hour Forex Chart

CHF Pairs: 1-Hour Forex Chart

As for the euro, lower overall borrowing costs in the euro zone means that some foreign investors are enticed to use the euro to fund carry trades. And during risk-on times, investors usually borrow euros to fund higher-yielding yet riskier assets, such as European equities for example.

And when sentiment switches to risk-off, which is apparently what happened this week, those foreign investors will then want to dump their “risky” assets but they would also have to return their borrowed euros, which gives the euro a boost. And like the Swissy, price action on euro pairs was a bit chaotic, as you can see below.

EUR Pairs: 1-Hour Forex Chart

EUR Pairs: 1-Hour Forex Chart

JPY

JPY Pairs Ranked (Aug. 15-19, 2016)

JPY Pairs Ranked (Aug. 15-19, 2016)

Like the Swissy, the Japanese yen is a safe-haven currency as well, but it had a mixed performance this week, which means that it was vulnerable to opposing currency price action. This was likely due to disappointment over Japan’s weak Q2 GDP reading (0.0% vs. 0.2% expected, 0.5% previous) at the start of the week.

JPY Pairs: 1-Hour Forex Chart

JPY Pairs: 1-Hour Forex Chart

CAD

CAD Pairs Ranked (Aug. 15-19, 2016)

CAD Pairs Ranked (Aug. 15-19, 2016)

Loonie pairs were mostly being led around by opposing currency price action during the week. There was no apparent reason for the Loonie’s submissiveness, though, especially since oil was in rally mode this week.

  • U.S. crude oil up (CLG6) by 9.01% to $48.50 per barrel for the week
  • Brent crude oil up (LCOH6) by 8.15% to $50.80 per barrel for the week

USD/CAD had no problem tracking oil, however. Although the currency pair did decouple from oil on Friday probably because of speculation ahead of the top-tier economic reports. And they were a disappointment because Canada’s inflation stagnated in July while July retail sales contracted.

USD/CAD vs. Oil: 1-Hour Forex Chart

USD/CAD vs. Oil: 1-Hour Forex Chart

It’s possible that forex traders were wary of being too exposed on the Loonie ahead of these economic reports. It certainly helps to explain the Loonie’s submissiveness during most of the week and the broad-based decline ahead of the economic reports, as well as further declines after those reports were released.

GBP

GBP/USD: 1-Hour Forex Chart

GBP/USD: 1-Hour Forex Chart

GBP Pairs Ranked (Aug. 15-19, 2016)

GBP Pairs Ranked (Aug. 15-19, 2016)

The pound was one of the stronger currencies during this trading week. And pound bulls can thank positive economic reports for that, namely the better-than-expected CPI readings for July and the blowout retail sales reading, also for July.

The better-than-expected readings for both economic indicators showed that the Brexit referendum had no negative impact on the British economy, well, there are no signs yet anyway. And that naturally encouraged some pound shorts to unwind their positions while enticing some pound bulls to jump in.

NZD

NZD/USD: 1-Hour Forex Chart

NZD/USD: 1-Hour Forex Chart

NZD Pairs Ranked (Aug. 15-19, 2016)

NZD Pairs Ranked (Aug. 15-19, 2016)

The Kiwi started the week on a mixed footing and then spent the rest of the week trading mostly sideways while being influenced by opposing currency action. It therefore appears as if forex traders were just not paying that much attention to the Kiwi, at least during this week.

Okay, here’s this week’s scorecard:

Scores (Aug. 15-19, 2016)

And here’s last week’s poll results:

Last Week's Poll

Only 1.79% of you voted for the Swissy, but the 8.93% who also voted for the euro and the 19.64% who voted for the pound would have been net winners as well, assuming you stuck to your bias. I just hope the 8.93% of you who voted for the Aussie, as well as the 19.63% who voted for the Greenback were able to switch your bias during the course of the week.

Now that you know what the likely main drivers were this week, and having taken a look at the forex calendar for next week, which currency do you think will come out on top next week? Vote in the poll below!

 

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  • ForExchange

    Very nice write up PipDiddy! I have to say, I can´t wait for the autumn to start. For swing traders these little movements with hardly any volatility and mostly ranging markets out there just do not give the best trading opportunities. I finally want to see trends! 🙂

    • Pip Diddy

      Thanks, @forexchange:disqus ! And, yeah, you and me both, haha.

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  • sitting duck

    Hi Pip Diddy,
    Thank you for your write ups, i am learning a lot from you and forex gump !

    I do have a question about the rise of the Euro and the Swissy.
    If i understand it correctly then the rise of the Swissy was because of safe haven flow and the rise of the euro was because the high yielding assets where paid with euros that where being returned.

    So the euro cannot be called a safe haven currency but is more a funding currency although that it acts the same as the swissy and the yen in a risk-off environment?

    Is the rise of the euro in a risk-off environment from the selling of mostly euro denominated assets or can i also be from other currency denominated assets?

    best regards,
    Nik

    • Pip Diddy

      Hey there, sitting duck! Happy to know that we’re helping you out!

      As for your first question, yes, you understood the concept correctly.

      Regarding your second question, the euro was considered a safe-haven currency, but it technically lost that status because of the ongoing Euro Zone debt crisis, which started in 2009 or thereabouts.

      But because of the ECB’s monetary policies, borrowing costs in the Euro Zone went down. And being the second most-traded currency after the U.S. dollar, the euro naturally became a funding currency. Although that only started around 2013 or 2014, if I can remember correctly, when some semblance of financial stability returned to the euro zone.

      Sorry, if I’m not being too specific on the dates, since I’m just writing based on facts that are on top of my head.

      Anyhow, the short answer to your second question is that the euro is technically no longer a safe-haven currency, but because of its use as a funding currency, it tends to act like one.

      And for your final question, outflows from assets denominated in other currencies can boost the euro. Just go back to the concepts of a funding currency, as well as carry trades.

      An example would be a foreign investor who borrows euros as a funding currency, sells those euros for, say, Aussie dollars, then buys Australian bonds and stocks in the hopes for higher yields.

      When that investor gets spooked by some risk aversion inducing event, he’ll naturally sell his Australian bonds and stocks. And if he also decides that he does not want to invest in Australian assets anymore, he’ll sell his Aussies to buy back euros before returning the borrowed euros.

      The euro’s rise last week was very likely due to the selling of euro-denominated assets, though, given that European equity indices suffered heavier and more broad-based losses, compared to the slight dip for U.S. equity indices and the mixed performance for Asian equity indices.

      Sorry for the wall of text. But I sure hope that clarified things a bit more.

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  • Pip Diddy

    You’re very welcome, Nik!

    With regard to that article that you linked to, that was true for the most part before the 2007-2008 credit crisis. Nowadays, it has become a bit more wonky, although it still makes sense in a way. If you reread that article that you linked to, it says that the USDX and the DJIA have a weak positive correlation of 0.35. The weak positive positive correlation, as the article explains, is likely because you need Greenbacks to buy U.S. stocks.

    However, there are other factors affecting demand (or lack thereof) for a particular currency. And depending on the currency, these other factors may overpower whatever equities-related buying or selling pressure there happens to be.

    A good example would be the yen, another currency that often has a negative correlation with equities, particularly with the Nikkei. One reason for this is the yen’s perceived safe-haven status and the apparent lack of determination on the part of the BOJ to intervene or introduce easing measures meant to curb the yen’s strength. Another reason is that the yen is also used as a funding currency. Yet another reason is that a strong yen is actually bad for Japan’s export-oriented companies. So if the yen rises, equity traders then bet that these export-oriented companies will suffer, dragging the Nikkei lower.

    Another example is the USD and U.S. equities. If you look at the daily chart that I attached below, you’ll see that the DJIA (red) has been steadily trending higher after an initial drop. The USD Index (blue), meanwhile, has been mostly down for the year. Hence, USDX and the DJIA are mostly negatively correlated, if you only consider this year’s price action.

    As you can also see, I highlighted two periods when price action had a prolonged divergence. The first one started in March when Fed officials sounded less optimistic before dropping a bombshell during the March FOMC statement when they downgraded their rate hike projections for 2016 from 4 to just 2.

    For the equities market, this sparked a “cheaper-rates-for-longer” mentality, which spurred a lot of buying. It sounds silly, given that U.S. corporate profits have been declining and P/E ratios are at historically high levels, but, well, the market is not always driven by reason. That’s why we get bubbles. Anyhow, for USD, this was a disaster and speculators who were betting on four rate hikes this year began to steadily unwind their long USD positions, which can be observed when you check out the COT reports. In this case, whatever bullish pressure there was for USD due to the equities rally was completely nullified by hedge funds and whatnot scaling out of their USD longs, as well as speculation that the USD will weaken further.

    The USDX and DJIA also noticeably diverged again this August. There are no clear reasons yet, but my own view is that the poor economic data have reduced rate hike expectations once more, and so we are getting a repeat performance of what happened in March. Another possible reason is that there’s less demand for USD because yields on U.S. bonds have actually turned negative on some instruments and for some buyers, if hedging costs and currency differentials are also taken into account.

    http://www.bloomberg.com/news/articles/2016-08-07/bond-market-s-big-illusion-revealed-as-u-s-yields-turn-negative

    I haven’t fully researched that yet, though, so don’t quote me, haha.

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