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?
Hmm. Looks like there wasn’t a dominant theme during this forex trading week, but we can clearly see that the Greenback, the Aussie, and the Loonie were getting the stuffing beaten out of ‘em, with the euro, the Swissy, and the Japanese yen doing most of the beating. So, what was driving forex price action this week?
Oil Rally Falters
- U.S. crude oil down (CLG6) by 7.76% to $31.01 per barrel for the week
- Brent crude oil down (LCOH6) by 1.75% to $34.13 per barrel for the week
For the forex newbies out there who missed what I’ve been saying the past two weeks, oil is a major Canadian export commodity, accounting for around 20% of Canada’s total exports. As such, the Loonie’s forex price action is positively correlated to the price action of oil. You can read our School’s lesson on How Oil Affects USD/CAD, if you want to know more.
Having said that, oil finally took a tumble after rallying for two consecutive weeks, although oil’s intraweek price action was actually more of a roller coaster ride if anything. It all started on Monday when China reported rather disappointing PMI readings, which naturally made market players worry about the demand side of the oil market equation.
Oil prices then slid further on Tuesday, apparently because of fading optimism over a potential meeting between OPEC members and non-OPEC members, with curbing oil production being the main agenda.
However, oil prices began rising again on the third day, due to improving sentiment after reports began to circulate during the morning London session that Russia was more open to a meeting. The intraweek rally strengthened further after the Greenback tumbled due to rather poor economic reports and a dovish speech from New York Fed President William Dudley. Some market analysts were pointing to the sudden liquidation of a $600 million leveraged short bet on oil as the primary catalyst, however.
Anyhow, oil started sinking again on Thursday due to renewed pessimism over a potential oil deal, according to some market analysts. Oil then weakened even further on Friday after the Greenback got some buyers over the mostly positive NFP report, although some analysts attributed the weakness to speculation on the possible outcome of this coming Sunday’s meeting between Venezuelan Oil Minister Eulogio Del Pino and his Saudi Oil Minister Ali al-Naimi in Riyadh.
Risk Aversion Domination
- Japan’s Nikkei 225 (N225) is down by 3.99% for the week
- Hong Kong’s Hang Seng (HSI) is down by 2.01% for the week
- FTSEurofirst 300 (FTEU3) is down by 4.82% for the week
- DAX (GDAXI) is down by 1.14% for the week
- DOW (DJI) is down by 1.58% for the week
- S&P 500 (SPX) is down by 3.10% for the week
Risk aversion was the name of the game during the trading week, and this was most apparent in the global equities market since almost all of the major global indices were in the red. There were some geopolitical news that soured risk sentiment, such as Turkey allegedly planning to invade Syria, and the NFP report also had a negative impact, but global equities seem to have been tracking falling oil prices for the the most part.
And if you’re asking what’s equities have to do with the forex market, then you should check out our School’s lessons on The Relationship Between Stocks and Forex, Forex Market Sentiment, and Carry Trades.
But to give you the gist of all those lessons, just know that forex traders flee to the so-called safe-haven currencies like the Japanese yen and the Swiss franc when risk aversion is the general market sentiment. On the flip side, forex traders usually load up on the higher-yielding currencies, such as the comdolls, during periods when risk-taking is rampant.
So now you know why the yen and the Swissy were in demand while the higher-yielding Aussie and Loonie were retreating during the trading week. Also, the lower-yielding euro has recently been behaving like a safe-haven as well, especially during the European trading session, which is likely why the euro was strong as well.
Fed Dudley’s Feb. 3 Interview
- “financial conditions are considerably tighter”
- strong USD could have “significant consequences”
The Greenback is recognized as a safe-haven currency as well, but it was getting a beatdown from its forex rivals, including the higher-yielders. Why? Well, we can blame Dudley’s dovish comments for that. Admittedly, ISM’s disappointing non-manufacturing PMI reading may have been a factor as well, but the bulk of the Greenback’s bearish move occurred before the PMI report was released, so I’m sticking to Dudley’s dovish comments.
Getting back on topic, New York Fed President William Dudley stated in his comments during an interview with Market News International (MNI) that there are “significant consequences” for the health of the U.S. economy should the Greenback continue to strengthen further, which naturally soured sentiment on the Greenback.
However, Dudley also said that: “One thing I think we can say with more confidence is that financial conditions are considerably tighter than they were at the time of the December meeting,” and that Fed officials “would have to take that into consideration” should those conditions remain in place by the time the March meeting rolls around.
What do “tighter financial conditions” mean, you ask? Well, in simple English that hopefully newbie forex traders can understand, “tighter financial conditions” just mean that borrowing moolah is difficult for whatever reason. And this implies that the Fed won’t be hiking rates or is very reluctant to do so since hiking rates would only make borrowing moolah even harder than it already is.
Also, such a dovish comment reinforces the Fed’s rather dovish tone during their most recent FOMC statement, which crushed the dreams of interest rate junkies who are still hoping for a rate hike by March.
Do you think these catalysts were enough to spark longer-term forex trends? Better keep these market themes in mind when planning your trades for next week!