Top Forex Market Movers of the Week (Oct. 3-7, 2016)

The forex trading week has come and gone. Time to take a look at what was driving forex price action. Were you able to profit from any of this week’s top movers?

Top Forex Weekly Movers (Oct. 3-7, 2016)

Top Forex Weekly Movers (Oct. 3-7, 2016)

Well, there’s no doubt that the main theme this week was pound weakness, given that 7 of the top 10 movers are pound pairs, with the pound losing in each and every one. And it can’t be immediately gleaned from the table of Top 10 Movers, but Greenback strength was also actually a major theme. So, what was driving forex price action?

GBP

GBP/USD: 1-Hour Forex Chart

GBP/USD: 1-Hour Forex Chart

GBP Pairs Ranked (Oct. 3-7, 2016)

GBP Pairs Ranked (Oct. 3-7, 2016)

In last week’s Top Forex Market Movers of the week (sounds kinda redundant, huh?), I noted that pound pairs were mostly trading sideways. I therefore wrote that we’ll hopefully get some action from the pound this week. Well, the market gods must have heard my wish because, boy oh boy, did we get a lot of action.

I mean, just look at the chart above. I already squashed the chart by a lot so that you can see most of the price action, but you still can’t see the intraweek lows for GBP/USD. As I noted on the chart, you can only see 1.2040 as the lowest price for GBP/USD, when its intraweek low was 1.1484, although that may vary depending on the data feed from your broker.

Anyhow, the main talk of the forex town was, of course, the so-called “flash crash” on the pound on Friday. Nobody really knows for sure what triggered the flash crash, but Forex Gump has listed down some of the more credible theories that have been making the rounds, so read more about that here.

Interestingly enough, the pound was already the weakest currency of the week by Thursday, which is the day before the flash crash. The pound started the week by gapping lower against its peers, thanks to British PM Theresa May’s announcement on Sunday that her government would be invoking Article 50 of the TEU by March 2017 in order to formally start the process for an actual Brexit. It’s worth pointing out, though, that British Foreign Secretary Boris Johnson already spilled the beans back on September 23 when he said that negotiations for an actual Brexit would start “probably in the early part” of 2017, as I noted in my Top Forex Market Movers for September 19-23, 2016.

Still, the announcement from the PM herself was enough to renew Brexit jitters. And the Brexit-related fears were so strong that the better-than-expected PMI readings for manufacturing (55.4 vs. 52.1 expected, 53.4 previous), construction (52.3 vs. 49.1 expected, 49.2 previous), and services (52.6 vs. 52.1 expected, 52.9 previous) were not able to hold back the tide of sellers during the course of the week.

And as a coup de grâce, the poor pound got slammed very hard during the flash crash. Not that I’m complaining or anything. Yee-Haw!

USD

USD/JPY: 1-Hour Forex Chart

USD/JPY: 1-Hour Forex Chart

USD Pairs Ranked (Oct. 3-7, 2016)

USD Pairs Ranked (Oct. 3-7, 2016)

Aside from the pound, I was also hoping last week that the Greenback will give us some decent action. And while the Greenback’s price action was not as dramatic as that of the pound’s, it looks like the market gods also granted that wish, since the Greenback was this week’s top dog.

According to many market analysts, the Greenback’s strength was due to speculation that the NFP report would be good enough to continue fueling expectations of a December rate hike. And ISM’s better-than-expected manufacturing PMI reading (51.5 vs. 50.4 expected, 49.4 previous) was the catalyst that’s usually cited as one that started it all.

But if we look at the chart above, the Greenback was actually trading sideways on Monday and even had a mixed performance. It wasn’t until Tuesday’s Asian session rolled around that the Greenback started moving broadly higher.

There were no direct catalysts for the Greenback at the time, but about two hours before the Greenback started moving (and several hours after the ISM PMI report was released), Cleveland Fed President Loretta Mester was interviewed by Bloomberg. In that interview Mester said that the case for a rate hike during the November FOMC meeting “would remain compelling.” She also said that the November FOMC meeting should be considered “live” for a possible policy decision.

Whatever the case may be, whether it was Mester’s hawkish rhetoric or the PMI reading (or both), the Greenback apparently gained strength on the back of expectations that the NFP report would be supportive of a rate hike. And so the Greenback steadily climbed higher before becoming a bit more mixed on Friday, as the the NFP report began to loom over the horizon.

Unfortunately, the NFP report ended up being a disappointment since non-farm payrolls only increased by 156K, which is below the expected 170K increase. It’s not really that surprising, though, since seasonal adjustments tend to lower non-farm payrolls in September, as Forex Gump pointed out in his Forex Preview for the September NFP report.

Anyhow, Forex Gump also has a more in-depth review of the NFP report, so read it here, if you’re interested.

The gist of it, though, is that the NFP report was a miss, and hence, hopes for a November rate hike got crushed and the Greenback got dumped as a result. However, the 156K reading is still above the 100K needed to keep up with the working-age population. Moreover, Fed Governor Stanley Fischer, Cleveland Fed President Loretta Mester, and Kansas City Fed President Esther L. George conveniently had speeches after the NFP report, and they used that as an opportunity to essentially say that the 156K reading was still a good reading, which is likely why the probability for a December rate hike improved and the Greenback tried to rally after the initial drop.

Unfortunately for Greenback bulls, the Greenback was already top heavy since it got bought up during the course of the week, and so profit-taking likely stopped the rally before it could gain further momentum.

It sure would be interesting to see what the market thinks of the Greenback and the NFP report next week, huh? And all the more so since several Fed officials have scheduled speeches next week, including Fed Head Yellen herself. Maybe they’ll also use their speeches to talk about the NFP report and monetary policy? I sure hope so!

The Other Currencies

Okay, here’s how the other currencies fared this week:

EUR

EUR/USD: 1-Hour Forex Chart

EUR/USD: 1-Hour Forex Chart

EUR Pairs Ranked (Oct. 3-7, 2016)

EUR Pairs Ranked (Oct. 3-7, 2016)

The euro ended up as the second-strongest currency after the Greenback this week. And, as you can see on the chart above, there were two instances of strong, broad-based euro strength.

The euro actually started the week on a weak footing as risk appetite sent European equities higher. Fortunately for euro bulls, Bloomberg released  a report, which cited some unnamed “euro-zone central-bank officials.” According to these unnamed officials, the ECB was supposedly planning on winding down their asset purchases by €10 billions blocks every month, several months before their QE program will officially end.

This rumor caused the euro to spike higher against all its peers, and also allowed the euro to just shrug off the rally in European equities for a while, even though ECB Overlord Draghi said that the rumor was unfounded.

The euro then had a more mixed performance after that, before getting some broad-based demand again during Friday’s morning London session, thanks to the slide in European equities. Interestingly enough the NFP report actually caused the euro to strengthen further against its peers (except JPY and CHF), likely because European equities were pushed deeper into the red in the aftermath of the NFP report.

Also, most of the major European equity indices closed the week with losses.

  • The pan-European FTSEurofirst 300 (FTEU3) closed 0.88% lower to 1,338.76 for the week
  • The blue-chip Euro Stoxx (STOXX50E) closed 0.98% lower to 3,002.56 for the week
  • Germany’s DAX (GDAXI) closed 1.28% lower to 10,490.86 for the week

CHF

USD/CHF: 1-Hour Forex Chart

USD/CHF: 1-Hour Forex Chart

CHF Pairs Ranked (Oct. 3-7, 2016)

CHF Pairs Ranked (Oct. 3-7, 2016)

The Swissy was following close on the euro’s heels. And strangely enough, the main driver for the bulk of the Swissy’s gains this week appeared to be the rumor about ECB QE tapering.

NZD

NZD/USD: 1-Hour Forex Chart

NZD/USD: 1-Hour Forex Chart

NZD Pairs Ranked (Oct. 3-7, 2016)

NZD Pairs Ranked (Oct. 3-7, 2016)

The driver for the Kiwi’s weakness this week is really easy – it was very likely the 3.0% slump in the Global Dairy Trade (GDT) Index after Tuesday’s auction. The 3.0% drop is the worst reading since the February 2 dairy auction. In addition, the hard slump puts an end to four consecutive bi-monthly auctions of increasing dairy prices.

Oh, for the newbies out there, New Zealand’s economy is literally powered by milk (and Hobbits). Concentrated milk alone, for example, accounts for around 18.3% of New Zealand’s total exports. A drop in dairy prices is therefore bad for dairy farmers and New Zealand’s economy as a whole.

Next!

JPY

USD/JPY: 1-Hour Forex Chart

USD/JPY: 1-Hour Forex Chart

JPY Pairs Ranked (Oct. 3-7, 2016)

JPY Pairs Ranked (Oct. 3-7, 2016)

Depending on the data feed from your broker, the yen either just barely won out against the Kiwi or just barely lost to it. Needless to say, the yen was one of the worst-performing currencies this week.

Looking at the chart above, it’s pretty clear that the yen broadly weakened from Tuesday’s Asian session to Thursday’s U.S. session before broadly gaining strength during Friday’s Asian session.

So, what happened on Tuesday? Well, there was unfortunately no apparent major catalyst for the yen. There was some risk-taking back then, which would have dampened demand for the yen. There was also chatter about the possibility of using direct foreign bond-buying as one of the BOJ’s policy tools to weaken the yen. Also, some traders and analysts were pointing to Greenback strength.

And based on how price action went down, that last bit about Greenback strength seems like the most probable reason, given that the yen broadly yet steadily weakened as the Greenback steadily advanced. Basically, the relentless buying on USD/JPY also likely enticed forex traders to sell the yen in all the yen crosses.

In any case, yen bulls were finally able to return on Friday, thanks to risk aversion also returning ahead of the NFP report. In fact, the yen even actually benefited from the NFP report since the NFP report drove European and U.S. equities lower, which then likely spurred demand for the safe-haven yen.

CAD & AUD

AUD/USD: 1-Hour Forex Chart

AUD/USD: 1-Hour Forex Chart

USD/CAD: 1-Hour Forex Chart

USD/CAD: 1-Hour Forex Chart

AUD Pairs Ranked (Oct. 3-7, 2016)

AUD Pairs Ranked (Oct. 3-7, 2016)

CAD Pairs Ranked (Oct. 3-7, 2016)

CAD Pairs Ranked (Oct. 3-7, 2016)

These two currencies had a mixed performance this week, which means that they were vulnerable to opposing currency action.

An interesting thing worth pointing out is that price action on both currencies began to diverge on Tuesday, as you probably saw on the charts above. Incidentally, this divergence is the reason why the two currencies ended up having a mixed performance.

Another interesting thing worth pointing out is that forex traders reacted to the much higher-than-expected net increase in Canadian employment (+67.2K vs. 7.5K expected, 26.2K previous) by buying up the Loonie across the board, which is pretty normal. However, the Loonie was very quickly dumped after being bought up, which is pretty weird. I don’t see anything particularly wrong with the jobs report and while oil was beginning to weaken by then, it’s still kinda weird that the overall positive jobs report had very little sticking power.

Hmm. It’s just an educated guess on my part, but it is possible that the more sophisticated traders were already expecting an upside “surprise” and were therefore only keen to “pillage some quick pips from the Loonie,” as Forex Gump puts it in his Forex Preview for Canada’s jobs report. A couple of thing worth pointing out from Forex Gump’s preview is that seasonal adjustments tend to give net employment a boost and that economists tend to underestimate the seasonally-adjusted reading. Chance was therefore skewed in favor of an upside “surprise”. Such a “surprise” is not really that surprising when you have some idea on how seasonal adjustments mess around with the numbers, though. And the more sophisticated traders probably already knew about that. Which is probably why the Loonie got bought up on the “surprising” number, but was quickly dumped when oil began to falter. Again, this is just an educated guess on my part, so feel free to share your own thoughts.

Okay, here’s this week’s scorecard:

Scores (Oct. 3-7, 2016)

And here’s last week’s poll results:

Last Week's Poll

The 17.02% who voted for the U.S. dollar got it right. Although the 17.02% who voted for the euro and the 2.13% who voted for the Swissy would have also done well. The 8.51% who voted for the Aussie and even the 8.51% who voted for the Loonie would have also ended up with net profits, assuming you spread your trades around to include GBP/AUD and GBP/CAD respectively. Unfortunately, there were 6.38% who voted for the Kiwi, 21.28% who voted for the yen, and 19.15% who voted for the pound. Hopefully, you were able to punch out in time, especially those who voted for the pound, given the pound’s slide on renewed Brexit jitters before the flash crash.

Now that you know what the likely 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!

 

 

  • ForExchange

    Hi Pip Diddy,

    Well, this past week there was definitely enough volatility out there 🙂 (not like last week)

    There is one important point only I would like to mention. Your broker must have had strange data feed. GBPUSD bottomed for you at 1.1484 and I checked Forex Gump´s chart, it showed the same so I guess you both use the same charts.

    On my chart the bottom was at 1.2029 which is almost 550 pips difference! That is significant and in case you trade live account as well at the same broker, I find that dangerous. That is of course only my opinion.

    Have a nice Sunday,
    FE

    • Pip Diddy

      Hi ForExchange!

      It’s not that strange. 🙂

      Reuters had the low at 1.1378 but later revised it to 1.1491 for some reason. Other than that, one broker shows 1.1739 while another says 1.1644. For the fixed-spread broker that I use for intraday trading, the low is 1.2030. I’ve even seen some brokers with lows at around 1.1100.

      Have a good week!

  • Costa

    Hello Pip Diddy,

    I have 2 questions for you:
    1. About the “flash crash”, how is it possible that someone is selling GBP at the same time against all the other currencies especially in the case of “fat finger” incident?
    2. About the Euro, why the EUR went up when there was a rumor about winding down the assett purchases? does it mean they will reduce the purchase? Why does it have a positive impact on the currency? Because it means that the economy is getting better and the ECB does not need to help to inject more money into the economy?
    I hope both questions make sense!
    Thank you very much
    Costa

    • Pip Diddy

      Heya Costa!

      For your first question, well that has more to do with the market makers – those who set the bid-ask price for a given currency pair.

      The major market makers are, of course, the really big banks. And generally, the big banks have a dedicated dealer for each major currency. The dedicated dealer is also usually the one responsible for making the quotes for all the cross currency pairs.

      So if the dealer sees a really big sell order for GBP/USD, for example, and the sell order was enough to significantly kick GBP/USD lower, then the dealer would also offer lower quotes for the other pound pairs.

      Well, that’s the usual scenario. Of course, it’s also possible that a hedge fund may have positioned itself across various pound pairs and accidentally ordered a mass dumping of the pound at any price, but that’s highly unlikely.

      For your second question, the winding down of asset purchases is good for a currency, the euro in this case, mainly because of 2 reasons:

      1. Asset purchases (mainly of government bonds) require the creation of money, which increases the money supply, which lowers the value of a currency.

      2. Buying up government bonds increases their price and lowers their yield, making them unattractive for foreign investors to buy. Fewer foreign investors means fewer or weaker foreign demand for a currency.

      I hope that cleared things up a bit for ya!

      • Costa

        Hi Pip Diddy,

        Thank you very much for clarifying!

        • Pip Diddy

          You’re welcome, Costa!

          By the way, I just read your questions again, and I would just like to add that winding down their asset purchases does indeed mean reducing their purchases. Well, that’s what the rumors said.

          And winding down means that the two negative effects on the currency that I mentioned in my previous comment would begin to disappear earlier than expected, which is good for the currency.

          Aside from that, the market didn’t necessarily take it as a sign that the Euro Zone economy is getting better.

          Rather, it was something unexpected because the overall Euro Zone economy is still in poor shape and the market was (and still is) expecting the ECB to extend its asset purchase program beyond March 2017.

          Another way to put it is that the market is expecting the ECB to either wrap up its asset purchases by March 2017 or extend it.

          Unwinding several months before March 2017 is therefore akin to ending asset purchases early, and the market wasn’t expecting that.

          I hope that makes sense!

          • Costa

            Hi Pip Diddy,

            You’re a star!
            Thank you very much for clarifying more.

            Considering that buying assets lowers the value of the currency and it is done in periods of poor economy, what’s the main purpose of buying assets by the government?
            I hope my question makes sense.
            Thank you once again.
            Costa

          • Pip Diddy

            You’re welcome!

            With regard to your question on asset purchases, well, they’re NOT intended primarily to weaken a country’s currency. Well, that’s arguably one of the intentions of the BOJ. But for the ECB and most other central banks, their asset purchase programs are intended primarily to boost inflation.

            Let me try to explain.

            When the economy is doing poorly, people tend to save and/or invest in relatively safe investments like government bonds. By buying up these government bonds, the ECB artificially inflates the price of the bonds while reducing their yield. This has two effects: (1) the bond becomes less attractive to buy and (2) those who already bought the bonds beforehand become a little wealthier.

            More wealth means potentially more spending power. And more spending means more demand, which means higher inflation. More wealth -> more spending -> higher inflation.

            Higher bond prices and lower yields, meanwhile, force investors to seek higher yield elsewhere, jacking up the price and lowering the yields of whichever asset class those investors go to. In the process, they hopefully get a little wealthier too. More wealth -> more spending -> higher inflation.

            Aside from consumers, the ECB is also targeting banks. The ECB does not directly buy bonds from the Euro Zone governments. Rather, the ECB buys them through banks and other financial institutions with cold, hard cash.

            Since they’re paid in cash, the banks and others can use the cash to purchase other assets, driving up prices for those assets over time and making whoever has positions in these assets a little wealthier. More wealth -> more spending -> higher inflation.

            Alternatively for banks, if the banks meet their reserve and liquidity requirement, they can lend out the cash they get from selling bonds. This act of lending to either consumers or business will hopefully have an impact on the real economy and result in higher investment or higher spending, which will eventually lead to higher inflation.

            Well, looks like I’ve got another wall of text for ya. Sorry about that.

          • Costa

            Hi Pip Diddy,

            The longer the better as I need to learn a lot about the markets! It’s the only way to expand my knowledge.

            Thank you very much!

          • Pip Diddy

            You’re very welcome, Costa! And good to know I’m helping ya out.

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