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?
Looks like the main themes for this forex trading week were pound weakness, Kiwi strength, and Loonie softness. And we have demand for the Aussie dollar, the Japanese yen, and the U.S. dollar as secondary themes. So, what was driving forex price action this week? Let’s take a look, shall we?
BOJ Monetary Policy Decision
- The BOJ kept its rates steady and kept its monetary base target of around 80 trillion JPY a year.
- The BOJ will extend the average maturity of its Japan government bonds (JGBs) from 7-10 years to 7-12 years.
- Starting in April, the BOJ will buy an additional 300 billion JPY worth of exchange-traded funds (ETF).
The BOJ essentially maintained its stimulus program while expanding the asset types available for purchase, which was a real disappointment to market players who were looking for more, causing the Nikkei 225 (N225) to give back it’s 2.66% gains for the day and close 1.90% lower at 18,986.80.
The sudden return of risk aversion and the fact that the so-called “quantitative and qualitative easing” program (QQE) was not expanded were very good news for yen, allowing yen pairs to break out of their respective ranges. The yen also able to recover a large swathe of lost ground from the U.S. dollar.
Monetary Policy Divergence
Diverging monetary policy biases help to account for the pound’s overall weakness during the forex trading week despite a string of mostly positive economic readings, such as retail sales jumping by 1.7% when it was only expected to rise by 0.6%.
If y’all still recall, the BOE’s MPC meeting minutes revealed that MPC officials were concerned about inflation, saying that they expect CPI “to remain below 1% until the second half of the year.” They also pointed out that wage growth flattened out recently due to various possible factors, including the fall in average working hours and the low CPI levels, which make it harder for employees to negotiate higher pay. MPC officials also maintained their less-hawkish stance, which means that a rate hike during the first half of 2016 is now highly unlikely to happen, prompting forex traders who have been betting on such a rate hike to continue liquidating their long positions.
This is probably why the Commitments of Traders forex positioning report from the CFTC shows that non-commercial long contracts on the pound versus the U.S. dollar dropped from 41,633 to 39,121 for the week ending on Dec. 15. True, non-commercial short contracts also dropped from 41,633 to 39,121, but this was more likely due to U.S. dollar bulls unwinding their positions ahead of the FOMC statement.
Monetary policy divergence also makes sense when you consider this week’s winning currencies. The Japanese yen had this week’s BOJ monetary policy decision, which I already discussed above. The U.S. dollar had this week’s rate hike and FOMC statement, which Forex Gump discussed in detail here. The Aussie, meanwhile, had the RBA’s meeting minutes, which confirms the RBA’s somewhat upbeat outlook when they decided to maintain rates during the Dec. 1 rate decision, so further rate cuts are probably unlikely. And while the RBNZ did cut the OCR from 2.75% to 2.50% last week, RBNZ Governor Graeme Wheeler hinted that further rate cuts are unlikely when he said in his statement that RBNZ officials “expect to achieve [the inflation target] at current interest rate settings.”
Oil Rout Continues & Poor Canadian Data
- Brent crude oil down by 3.35% for the week to $37.93 per barrel
- U.S. crude oil down by 2.53% for the week to $34.72 per barrel
- Canadian manufacturing sales m/m: -1.1% vs. -0.4% expected, -1.5% previous
- Canadian CPI m/m: -0.1% vs. +0.1% expected, +0.1% previous
- Canadian CPI y/y: +1.4% vs. +1.0% previous
- Canadian core CPI m/m: -0.3% vs. 0.0% expected, +0.3% previous
- Canadian core CPI y/y: -+2.0% vs. +2.1% previous
- Canadian wholesale sales m/m: -0.6% vs. 0.1% expected, -0.3% previous
Oil was in the red again this week, closing at seven-year lows due to oversupply concerns. This marks the third consecutive week of losses for oil, which is gonna bring more headaches for the Canadian economy and is one of the main reasons why the Loonie has been rather soft for the week. And if you’re wondering what oil has to do with Canada or the Loonie, then you probably need to check out our School’s lesson on How Oil Affects USD/CAD.
Moving on, Canada also got a string of poor economic readings during the week. Canadian manufacturing sales for the October period, for example, was down by 1.1% month-on-month due to “Declines in the petroleum and coal product, aerospace product and parts, and machinery industries.” Manufacturing inventories also rose by 0.5%, which could indicate lower demand.
Canada’s CPI also took a hit during the November period. And while the headline CPI looked a bit healthier an annualized basis, do note that annualized core CPI reading also had a downtick, so there’s an inherent weakness there. Finally, wholesale trade in Canada was down by 0.6% for October instead of increasing by 0.1%, which could mean that next week’s retail sales reading may be a disappointment as well.
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!