Now that Q2 2017 is about to come to an end, it’s time to sit back, chillax, and take stock of the events and themes that either had a broad effect on forex price action or caused certain currencies to significantly outperform (or under-perform).
And on that note, the euro very clearly outperformed in Q2 2017. In fact, the euro is THE best-performing currency of the year (so far).
The worst-performing currency in Q2, meanwhile, was the yen.
And it may come as a surprise to some, but the Swissy was the second best-performing currency of Q2 2017. Heck, the Swissy is now the second strongest currency of the year after the euro.
So, what were the major themes and market-moving events in Q2 2017?
1. European Political Drama
European politics helped to drive price action not only in the forex market, but in other market as well, global equities in particular.
With that said, two of the most important European political events in Q2 were the French Presidential Elections and the U.K. General Elections.
French Presidential Elections
Late last year, there was a narrative that Brexit and Trump’s victory were signs that right-leaning populist movements were on the rise.
And since there were upcoming elections in the Euro Zone, fears began to flare up that if more right-leaning parties come into power, then the future of the EU would have become murky because right-leaning parties in Continental Europe tend to be anti-EU as well.
As such, fears were high that the anti-EU Front National’s Marine Le Pen would come into power in France, since France is one of economic and political heavyweights in the EU (after Germany).
As it turns out, however, the pro-EU Centrist Emmanuel Macron won in the first round of the French elections. Le Pen did come in second place.
Even so, Macron’s margin of victory over Le Pen and the polling results for the second round of the elections pointed to a clear win for Macron.
And the rest, as they say, is now history. And since Le Pen got defeated, market players breathed a sigh of relief. And they showed this by substantially unwinding their euro shorts, as can be seen in the COT report.
Macron’s victory, particularly during the first round of the elections, also caused overall risk sentiment to improve. And in the forex market, Macron’s victory caused both the euro and the Swissy to gap higher and then appreciate hard against their peers.
U.K. General Elections
Back on April 18, U.K. Prime Minister Theresa May called for early elections in an attempt to strengthen her Brexit negotitaing position by winning an even bigger majority of seats in Parliament.
As a result, the pound jumped higher on this news because polls at the time were indicating that the Conservative had a comfortable 20+ points lead against the Labour Party.
As election day drew closer, however, the Conservative Party’s lead began to shrink to nail-biting single digits. As such, the pound’s strength faltered. And when exit polls and actual results started to come in, it became clear that the Conservatives won’t be able to capture the 326 seats needed for a majority, which resulted in a hung Parliament. And because of Theresa May’s weaker negotiating position on Brexit and the increased political instability of a minority government, the pound plunged as a result.
2. Central Bank Biases
There were either significant shifts in central bank biases or central bank biases became even more established in Q2.
The Fed, for example, hiked in June and continues to forecast one more hike this year. Moreover, the Fed said in it may start trimming its balance sheet “this year.”
The BOE’s hawkish bias, meanwhile, became more established when more BOE members switched to the hawkish camp and BOE Chief Economist Haldane, a well-known dove, said that he was mulling about joining the hawkish camp during the June BOE statement and then openly said that he is willing to vote for a hike if economic conditions in the U.K. evolve as expected.
The BOC, for its part, removed its easing bias during the April BOC statement and BOC Senior Deputy Governor Carolyn Wilkins even hinted at a potential hiking bias during a June 12 speech. Incidentally, Wilkins’ surprisingly hawkish speech caused the Loonie to decouple from oil prices.
As for the ECB, it became optimistic on the Euro Zone’s recovery in Q2, which very likely helped to sustain demand for the euro (and scared euro bears away). In fact, the ECB even removed its easing bias on interest rates during the June ECB statement, although it did retain its easing bias on QE because the ECB is not yet sure that the recent rise in inflation is sustainable.
Anyhow, you can read more on central bank biases by reading up on the following (click them):
3. The Swissy-Euro (Re)Connection
As mentioned earlier, the Swissy is not only the second strongest currency of Q2, but is now the second strongest currency of the year (so far) as well.
This may come as a surprise to some, given that the SNB constantly sings about the Swiss franc being “significantly overvalued” while threatening to intervene in the forex market.
However, this is hardly surprising for people who regularly follow Pip Diddy’s weekly recaps, as well as those who were able to read up on my write-up titled What’s Up With The Swiss Franc Lately.
Anyhow, I pointed out in my write-up that the positive correlation between the Swissy and the euro are back in play again after getting messed up when the SNB removed the peg on EUR/CHF two years ago and adopted “currency intervention” (a.k.a. currency manipulation) as a monetary policy tool.
And since there’s a saying that a picture is worth a thousand words, here are some charts to show you what I mean.
4. The Yen Lost Its Mojo
I noted earlier that the yen was the worst-performing currency of Q2. And a large part of that was due to the yen’s broad-based weakness in April and May, even though geopolitical events at the time (such as the French elections) meant that risk aversion was the dominant sentiment.
I actually already discussed this in depth in an earlier write-up, which you can read here. The short version of it, however, is that rising tensions in North Korea very likely eroded the yen’s status as a safe-haven currency.
After all, you can’t really call the currency of a country that may get nuked any time as a safe-haven now, can you?
Heck, even Japanese Finance Minister Taro Aso blatantly warned in a May 2 speech that “We should always think about what the yen would be like if something happens in North Korea,” adding that the North Korea situation has made the yen’s status as a safe-haven currency “extremely unstable.”
Thankfully, thinks have simmered down since the yen appears to have returned to tracking bond yields, as well as acting as a safe-haven once more.
5. Trump-Russia Conspiracy Theory
Quite understandably, they don’t get as much coverage in the mainstream media (especially on CNN), but recent developments such as CNN Senior Producer John Bonifield admitting that CNN has an anti-Trump political agenda (watch it here) and CNN Commentator Van Jones caught on camera saying that “the Russia thing is just a big nothing burger” (watch it here) do point to the growing possibility that the Trump-Russia Conspiracy is nothing more than a conspiracy theory, not to mention Comey’s testimonies.
In the forex market, however, it looks like this “Russia thing” really put the hurt on the Greenback since the Greenback started sliding across the board after Trump admitted in an NBC News interview that he was planning to fire Comey regardless of the recommendation from Jeff Sessions.
The Greenback really felt the pain the week after that, though, since the media launched a media blitz against Trump, as documented by Pip Diddy in his recap for the May 15-19 trading week.
This is the single greatest witch hunt of a politician in American history!
— Donald J. Trump (@realDonaldTrump) May 18, 2017
This caused speculation to ramp up that Trump may get impeached. Also, it very likely caused Greenback bulls to flee, especially those who were hoping that Trump’s fiscal plans would come to pass.
Things have calmed down a bit after that since nothing really came out of Comey’s testimonies. Even so, this “Russia Thing” is probably continuing to dampen demand for the Greenback, since even the Fed’s June rate hike (and forecast for one more) are not enough to reignite demand for the Greenback.
Anyhow, Q2 2017 was a very interesting, action-packed, somewhat chaotic, and strangely fun overall, with lots and lots of themes in play. Heck, the ones listed above are only the major ones. Anyhow, hopefully we’ll get just as much volatility and preferably more directional movement in Q3.