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?
Based on that there list, it looks like the main theme for this forex trading week was the Swissy’s weakness given that 5 out of the top 10 movers of the week are Swissy pairs. In addition, we have U.S. dollar and yen strength as well as pound weakness as minor themes. So, what drove forex price action? Let’s take a look, shall we?
- Pan-European FTSEurofirst 300 (FTEU3) closed 0.47% higher at 1,512.31 after dipping to 1,468.88
- Euro Stoxx 50 (STOXX50E) closed 1.01% higher at 3,487.51 after dipping to 1,468.88
- DAX (GDAXI) closed 1.54% higher at 11,293.76 after dipping to 10,869
- FTSE 100 (FTSE) closed 0.64% higher at 6,375.15 after dipping to 6221.33
Risk aversion was the name of the game during the first two days of the trading week due to global tensions over Turkey’s downing of a Russian warplane and a rout in commodity prices that dragged mining companies down with them. Demand for higher-yielding currencies like the pound naturally got dampened as forex traders and other market players fled to the sweet embrace of safe-haven currencies (USD, JPY, CHF).
Risk appetite got resuscitated during Wednesday’s London forex session, however, as Turkey and Russia made overt gestures of wanting to avoid conflict and easing tensions. The return of risk appetite resulted in risk-taking, which allowed European equities to surge higher. The pan-European FTSEurofirst 300, for example, climbed by 1.41% on Wednesday, erasing Tuesday’s losses and then some.
The spurt in risk-taking naturally convinced market players to abandon the lower-yielding currencies in search of higher yields, with the Swissy and the euro being the most prominent victims.
Monetary Policy Divergence
Despite the return of risk appetite, demand for both the Japanese yen and the Greenback remained rather strong. This was most probably due to the continuing divergence in monetary policy. Forex Gump was nice enough to round up the current biases of the major central banks in a two-part series, so check his blog out for the details (read part 1 here and part 2 here).
With regard to the Greenback, the data points that came out during the week were mostly positive. Heck, some of them were even downright optimistic. Q3 2015 U.S. GDP growth, for instance, was revised higher to 2.1% from 1.5%, which is slightly better than than the expected upward revision of 2.0%. Overall, the U.S. Fed still looks like it’s set for a December rate hike, fueling demand for the Greenback.
As for the yen, the BOJ meeting minutes for the October 30 huddle was devoid of any hints with regard to further easing moves despite the Japanese economy falling into a technical recession. In fact, the economic outlook of BOJ officials remained upbeat, even though they admitted that exports have been more or less flat, and will probably continue to remain flat for some time to come.
In contrast, ECB officials were talking about potential easing plans during Wednesday’s London forex session, which further drummed up speculation that the ECB will be introducing more easing moves in the upcoming December meeting, causing the euro to weaken.
The pound, meanwhile, was feeling the burn from BOE Governor Mark Carney’s testimony before members of the British parliament that a low interest rate environment is “likely to remain for some time.” BOE Chief Analyst Andy Haldane’s comment that risks to UK GDP growth and inflation are “skewed materially to the downside, more so than embodied in the November 2015 Inflation Report” was also probably weighing-in on the pound since it supports the idea that the BOE will no longer be hiking rates in early 2016.
SNB Intervention Speculation
Media outlets such as Reuters and Bloomberg were pointing to speculation that the SNB will be intervening in the markets by weakening the Swissy as a possible explanation for the broad Swissy selloff during Friday’s London forex session.
This is, of course, within the context of this coming Thursday’s (Dec. 3, 1:30 pm GMT) ECB meeting and rate decision, together with the ECB’s openness to further easing and predictions by pundits of more easing moves in the lead up to that event. Adding to this mix is the precedent of the SNB removing the floor on EUR/CHF way back on January 15 of this year, just a few days before the ECB’s January 22 meeting, as well as the SNB’s mantra that the Swiss franc is still “significantly overvalued.” And if you take all those factors into consideration, then an intervention from the SNB is certainly within the realm of possibility.
But despite the plausibility of a possible SNB intervention, nobody really knows for sure why the Swissy weakened as it did on Friday. And we haven’t really heard anything from SNB officials yet.
Do you think these catalysts were enough to spark longer-term forex trends or did they just cause a knee-jerk reaction? Better keep these market themes in mind when planning your trades for next week!