It’s near the end of the year once more, but before I start rolling out my customary year-end reviews for each currency, lemme give y’all a quick month-by-month rundown of the major themes and events this year.
January: Chinese Equities Meltdown
The new year started off with a bang, or to be more accurate, a massive global equities dump. The global equities selloff started when Chinese equities went into freefall, which then triggered China’s so-called circuit breaker system on two separate occasions during the January 4-8 trading week.
The selloff was so bad, that on January 7, the so-called circuit-breaker was triggered and trading was stopped after just around 15 minutes of trading. In that time, the Shanghai Composite plunged a stunning 7%.
But what triggered the Chinese equities meltdown? Well, as I wrote in a January 8 article and as Pip Diddy pointed out in his weekly recap, the prime catalyst appeared to be China’s disappointing manufacturing PMI reading (48.2 vs. 48.6 previous), since it pointed to further deterioration in China’s economy.
The Chinese equities meltdown really put a squeeze on the higher-yielding currencies, with the Aussie and the Kiwi getting hit the hardest, thanks to their close trading relationship with China. But the Loonie got sideswiped as well because the Chinese equities meltdown caused oil prices to plunge on concerns that a further slowdown in the Chinese economy would mean weaker demand for oil.
And while the safe-haven yen was one of the major benefactors of the severe aversion to risk during the month, it did get slapped around a bit near the end when oil recovered a bit and the BOJ decided to cut its benchmark interest rate for the first time since October 2010, citing the slide in oil prices, worries over China’s slowdown, and volatility in the financial markets (among others) as the reason for the rate cut.
February: The Brexit Saga – Act 1 Begins
Like January, the month of February was also plagued by intense risk aversion, so the safe-haven yen was in high demand. Jitters over the Chinese economy and concerns over oil were still major factors in determining risk sentiment and forex price action, but a new theme was beginning to make the rounds – Brexit.
As I noted in a February 10 write-up, the market’s interest in the Brexit Saga began on February 2 European Council President Donald Tusk finally replied to then British PM David Cameron’s November 15, 2015 letter. To make a long story short, Cameron’s letter contained some much-needed reforms to convince the British people to vote against Brexit.
But Tusk did not give Cameron everything he wanted, so the focus shifted to the February 18-19 E.U. summit, since that’s the time in which Cameron can try to get a better deal while the other E.U. members get to say their piece on Tusk’s concessions. And as it turns out, Cameron was able to hammer out a deal to give the U.K. a special status in the E.U., so he confidently announced that the Brexit referendum will be on June 23. And so the Brexit Saga begins.
During all this time, Brexit-related jitters weighed down on the pound. And as a result, the pound ended up as the worst-performing currency of the month.
March: Central Bank Surprises
The month of March was characterized by lots of central bank surprises. First up was the RBA and its switch to a clearly less dovish tone during the March RBA statement. To be more specific, the RBA maintained its monetary policy but unexpectedly became less dovish, by refraining from talking down the Aussie and even removing its downbeat statement on Australia’s GDP growth, which naturally stoked demand for the Aussie.
After that, the RBNZ unexpectedly slashed its policy rate from 2.50% to 2.25% and the ECB did the same, slashing rates across the board while expanding its QE program from €60B to €80B starting in April 2016.
Finally, the Fed maintained its current monetary policy in March, which is not really surprising. What’s surprising, however, is that the Fed downgraded its economic projections and communicated a slower path to hiking, saying that there was now room for only 1-2 rate hikes, down from 3-4 originally. As a direct consequence of the Fed’s decision, as well as Yellen’s dovish speech (among others), the Greenback got whupped and was the worst-performing currency of the month.
April: Oil Struck
Risk sentiment was dependent on oil prices for the most part during April, probably because many of the market-moving headlines at the time were related to oil. Heck, you just need to read up on Pip Diddy’s session recaps (such as this, this, and this) to get a feel that risk sentiment was being driven mainly by oil.
Special focus was on the Doha oil freeze deal, but that turned out to be a dud, so oil slumped. However, fresh oil-related news, which I detailed here allowed oil to recover, reviving risk appetite in the process. Incidentally (well, not really), the Loonie ended up as one of the best performing currencies of the month.
May: The Brexit Saga Continues
With just under a month until the highly-awaited June 23 Brexit referendum, focus shifted back to the Brexit saga during the month of May. Risk aversion, a lot of which is related to the Brexit saga, continued to fuel demand for the safe-haven currencies, but the safe-haven of choice ended up being the Greenback rather than the yen.
A possible reason for this is the upbeat rhetoric by Fed officials. In contrast, Japanese PM Shinzo Abe warned at the start of the month that sudden forex moves were undesirable and that Japan would “carefully watch these movements and as necessary we would need to respond” to the “excessive” moves.
Moving on, oil was also still in play, although unlike in April, it didn’t have as much influence on risk sentiment during the month of May. As to the main driver of oil’s price action in May, well, that was easily the massive wildfire in Canada’s oil-rich province of Alberta, which forced Canadian oil companies to cut down or completely stop oil production, which then naturally sent oil higher, although the Loonie was more hesitant because of the damage being inflicted by the wildfires.
Getting back to the Brexit saga, the pound was able to win out against most of its peers during the month, with the exception of the Greenback. And the pound’s strength was due to polls mostly showing that the “remain” camp was beginning to gain an advantage against the “leave” camp, which then eased Brexit-related t jitters.
June: The Brexit Saga – End of Act 1
The month of June was all about the Brexit referendum, and this is made quite clear when you look at Pip Diddy’s weekly recaps for the month (here, here, here, and here). If you clicked on those links, you’ll see that the pound was the most volatile currency in 3 out of 4 weeks, and that the pound’s price action (and risk sentiment as well) was being driven mainly by Brexit-related news, usually in the form of polls. And the polls were pointing to a win for the “remain” camp, so the pound initially won out against its peers.
However, the British people voted to leave the E.U. in the end, contrary to what political pundits were saying and what the polls were showing, and so the pound plunged very hard as a result. At the same time, panicking investors fueled demand for the safe-haven yen. And so Act 1 of the Brexit saga ends. Now we just have to wait for Act 2 to begin – the Actual Brexit.
July: The Interim Period
Price action was rather chaotic in July, with many pairs trading sideways for the month. There were some noticeable events, though, with the main one being the pound’s recovery, thanks to Theresa May’s ascendancy into power as the new British PM, as well as the BOE’s unexpected decision to refrain from cutting rates while maintaining a wait-and-see stance, albeit with a clear easing bias.
Another significant event, was the yen’s significant depreciation during the first half of the month, thanks to Shinzo Abe’s planned fiscal stimulus announcement.
August: Rate Cuts Galore
Price action in August was still a bit chaotic, with two-way action on may pairs. However, central bank events were in focus again.
The most interesting ones include the RBA’s decision to cut rates from 1.75% to 1.50% in order to help sustain growth and help push inflation closer to the RBA’s target. Another was the BOE’s decision to cut rates while reviving its QE program (among others) after assessing its outlook in the wake of the Brexit referendum. Yet another was the RBNZ’s rate cut (and threats of more) on expectations that New Zealand’s inflation will remain depressed.
September: Risk Aversion Aplenty
There was not much action from central bank activity in September, but the safe-haven yen was the best performing currency during the month of September, thanks to risk aversion aplenty. There was no single driver for risk sentiment, since they included slumping commodities and Deutsche Bank’s troubles among others.
And while the BOJ introduced its so-called “QQE With Yield Curve Control” framework in September, the BOJ actually refrained from easing further, which opened the door for yen bulls to pounce.
October: Fed Rate Hike Expectations
There were actually many high profile events playing out during the month of October, such as the pound’s “flash crash”, and the various oil-related news after OPEC announced that they have an oil cut deal in the works.
However, there appears to be an underlying theme that allowed Greenback to win out against its peers during the month – higher rate hike expectations. It all started when ISM reported an improvement in its September manufacturing PMI reading, which was then followed up by an interview with Cleveland Fed President Loretta Mester wherein she said that the case for a rate hike during the November FOMC meeting “would remain compelling.”
These two events together apparently sent the Greenback soaring. And economic data after that mostly supported expectations of a November or December rate hike, thereby keeping the Greenback supported. Greenback bulls got a nasty surprise near the end of the month, however, thanks to discovery of new emails linked to Hillary Clinton, which ruined the mainstream media’s narrative at the time that Clinton was gonna win the White House.
November: Trump Triumphant
The month of November was dominated by news about the race to the White House, until the Donald got crowned as the new emperor, er, I meant became the President-Elect. And as a result, the Greenback initially plunged as Trump’s victory became imminent, because the running narrative at the time was that Trump’s gonna be catastrophic for the U.S. and global economy.
However, the Greenback quickly shot back up as uncertainty faded and the market looked forward to Trump’s planned fiscal stimulus. And if you wanna see just how far-reaching Trump’s victory was on the forex market, just check out the charts in Pip Diddy’s weekly recap here.
Interestingly enough, the pound was also a major benefactor of Trump’s victory because a narrative emerged, in which Brexit and Trump’s victory are signs that Eurosceptic, anti-establishment movements in continental Europe are gaining strength, which eased Brexit-related bearish pressure on the pound, as focus switched to the Euro Zone instead.
After that, the Trump Effect persisted, with the yen feeling the brunt of the hurt, thanks to rising bond yields. Although some of the focus began to shift to the December FOMC statement near the end.
December: Trump Effect Still in Effect
Speculation on Trump’s planned fiscal stimulus persisted, improving overall market sentiment while slapping the yen silly, as U.S. bond yields and U.S. equities continued to rise. And while the December FOMC statement does appear to have taken over as the main driver of the Greenback’s price action, the Trump Effect can still be seen when Yellen admitted that “Some of the participants, but not all of the participants, did incorporate some change in fiscal policy into their projections, and that may have been a factor.”
This is within the context of the Fed’s upgraded rate hike expectations. You see, the Fed originally forecasted 1-2 rate hikes in 2017, but they unexpectedly upgraded that to 2-3 while upgrading projections for growth to boot.
Incidentally, the Kiwi and the Aussie (to a lesser extent) have been weakening after the FOMC decision. And as Pip Diddy pointed out in one of his weekly recaps, this was likely due to the narrower interest rate differentials, since that plus the expected faster growth in the U.S., as well as expectations of more rate hikes in the future, would ease demand for the higher-yielding currencies.
Okay, that’s all for now. We’ll be discussing more in-depth once we begin reviewing each individual currency.