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?
Given how the euro jumped after the ECB rate cut, I bet you were thinking that the euro was gonna be the top dog of the forex trading week. Well, think again boys and girls because only two euro pairs managed to make it to this week’s top 10. The main themes (yes there was more than one) for this forex trading week were actually Swissy and Kiwi strength.
ECB Monetary Policy Decision
- ECB maintains refinancing rate at 0.05% as expected
- ECB maintains marginal lending rate at 0.3% as expected
- ECB cuts deposit rate to -0.3% from -0.2% as expected
- Quantitative easing (QE) program maintained at €60 billion/month
- QE program was extended by 6 months to March 2017
Forex Gump already took a more in-depth look at the ECB’s monetary policy decision and why the euro spiked higher instead of spiking lower, so read it here if you want the details. The gist of it all, though, is that forex traders have been pricing-in further easing moves from the ECB ever since the ECB announced that they were open to more easing during the previous rate statement and press conference. Also rhetoric from top ECB officials since then have been hinting at more easing. Heck, if you still remember, I mentioned last week that ECB officials were openly talking about potential easing plans.
In short, it was a case of buying the rumor and selling the news, or in the euro’s particular case, shorting the euro ahead of the ECB decision and then covering when the actual decision came out. Good, great, but what does all that have to do with the Swissy and how it managed to outperform the euro, you ask?
Well, Forex Gump also mentioned the lack of “oomph” in the additional stimulus measures since the ECB did not bother to expand its QE program, which is actually good for the euro since QE involves printing more euros primarily for bond-buying purposes, devaluing the euro in the process.
Another side effect of bond-buying is the reduction of bond yields or interest on bonds (read our School’s lesson on How Bond Yields Affect Currency Movements if you don’t understand why), which forces investors to look for higher returns somewhere else, and equities happen to be one of the go-to assets. So now you understand why risk aversion smashed into global equities like a tidal wave, as the market’s expectation of more bond-buying was not met (U.S. equities were able to recover due to the positive NFP report, however).
And this risk aversion, which caused the pan-European FTSEurofirst 300 to drop by 3.42% in just one friggin day, most likely convinced forex traders and European equity investors to flee to the safe-haven Swissy for protection despite a string of poor economic readings for Switzerland during the forex trading week, such as Swiss Q3 2015 GDP flattening out.
Also, I mentioned in last week’s Top Forex Market Movers that the Swissy mysteriously weakened on Friday and media outlets were pointing to speculation that the SNB will be intervening as the reason. If that were true, then I bet that those forex traders who shorted the Swissy were either unwinding their Swissy shorts or getting stopped out and giving an extra bullish boost to the Swissy since an intervention from the SNB was apparently not forthcoming… during this forex trading week at least.
ANZ’s New Zealand Business Confidence Survey
- Business confidence index: 14.6 vs. 10.5 previous
- Activity outlook: 32.0 vs. 23.7 previous
- Investment intentions: 14.6 vs. 12.0 previous
- Profit expectations: 14.9 vs. 12.7 previous
- Employment intentions: 13.5 vs. 12.1 previous
- Export intentions: 22.8 vs. 22.4 previous
I noted during Monday’s Asian Session Forex Recap that the Kiwi began climbing across the board after ANZ reported that New Zealand’s business confidence index jumped to a six-month high. Looking at the charts, it sure looks like this is the catalyst that triggered the bulk of the Kiwi’s upmove since the positive result for the latest dairy auction, which broke three straight auctions of negative results, barely had a positive effect on the Kiwi.
More than that, the jump in business confidence was the latest in a string of positive readings which have graced New Zealand and the Kiwi. And if you looked ahead into next week’s forex calendar, you probably noticed that the consensus among forex traders and economists is that the RBNZ is expected to cut the OCR from 2.75% to 2.50% this coming Wednesday (Dec. 9, 8:00 pm GMT).
Well, that has been the market consensus until the start of the week at least. However, the string of mostly positive data lately has probably convinced some forex traders that the RBNZ may not be cutting rates after all, and some analysts have concluded as much.
Incidentally, speculation that the RBNZ may not be cutting rates next week helps to explain why the Kiwi reacted as it did to the…
Positive NFP Report
- U.S. employment up by 211K in Nov vs. 201K forecast
- U.S. Oct NFP figure upgraded from 271K to 298K
- U.S. jobless rate unchanged at 5.0% as expected
- U.S. average hourly earnings up by 0.2% as expected
The very positive NFP report caused the Kiwi to spike higher. Wait, what? Yep, that’s right the main beneficiary of the positive NFP report was the Kiwi (and the Aussie to a lesser extent), and not the U.S. dollar.
Let’s get the elephant in the room out of the way first. So, why didn’t the Greenback spike higher given that the NFP report was pretty good. Well, if you took the time to read Forex Gump’s Forex Trading Guide on the NFP report, then you already know the most likely answer. If you don’t want to click that link (click that link, you know you want to), then just know that Forex Gump presented a possible scenario wherein forex traders who have been betting on a December rate hike (as well as forex traders who were betting on an upside surprise for NFP) would be selling into a potential Greenback rally. And that, I think, is the scenario that played out here.
Okay, great, but why did the Kiwi (and the Aussie) spike higher, you ask? It’s simple, really. The positive NFP report caused risk appetite to return with a vengeance, causing the S&P 500 to spike higher and close 2.05% in the green for the day. Risk appetite also meant demand for the the higher-yielding currencies such as the Kiwi and the Aussie.
Also, the fact that the Kiwi fared much better than the Aussie reinforces the idea I mentioned earlier that forex traders are speculating that the RBNZ will not be cutting rates next week. But the forex market is fickle, so we may see a change in sentiment next week.
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!