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 we had euro, pound, and Swissy weakness, as well as demand for the Japanese yen, the Loonie, and the Aussie as this trading week’s main themes. Well, let’s dive right in and see what was driving forex price action this week, shall we?
Risk Appetite Returns to Global Equities
- Shanghai Composite (SSEC) closed 3.49% higher for the week
- Japan’s Nikkei 225 (N225) closed 6.79% higher for the week
- Hong Kong’s Hang Seng (HSI) closed 5.27% higher for the week
- FTSEurofirst 300 (FTEU3) closed 4.30% higher for the week
- U.K. FTSE 100 (FTSE) closed 4.25% higher for the week
- DAX (GDAXI) closed 4.69% higher for the week
- DOW (DJI) closed 2.62% higher for the week
- S&P 500 (SPX) closed 2.84% higher for the week
After a two-week losing streak, global equities were finally able to recover during this trading week. The returning appetite for risk was initially sparked by Monday’s higher peg on the Chinese yuan, which eased deflation fears, as well as recovering oil prices due to speculation that OPEC members would finally sit down to discuss a potential cut back on oil production.
Positive reports and events related to oil, such as the deal to freeze oil production at January levels, kept fueling (hah!) appetite for risk through the week. Although positive earnings reports for individual companies and improving sentiment for particular sectors, especially the energy and banking sectors, were also driving global equities higher.
Anyhow, the broad demand for global equities during the trading week clearly showed that risk-taking was the name of the game, which helps to explain why the lower-yielding euro and the safe-haven Swissy were on the decline while the Loonie and the Aussie, which are both higher-yielding comdolls, were on the offensive.
Oh, for the forex newbies out there who are wondering what equities and risk sentiment have to do with the forex market, please check out our School’s lessons on The Relationship Between Stocks and Forex, Forex Market Sentiment, and Carry Trades. But as a quick lesson, just know that equities are a good gauge for risk sentiment and that forex traders tend to buy up higher-yielding currencies like the comdolls when there’s a lot of appetite for risk in the markets. But on the flip-side, forex traders tend to flee to safe-haven currencies like the Japanese yen and the Swiss franc when risk aversion is the dominant sentiment.
With that said, we come to two anomalies during the trading week:
- a stronger yen, despite being a safe-haven currency
- a weaker pound, despite being considered a higher-yielding currency
Let’s tackle the pound’s overall weakness first. And as y’all can see on that there list below, the pound was losing out to most of its forex rivals, scoring wins only against the Swissy and the euro, which is not really that much of a surprise since the euro and the Swissy were the main losers of the week because of the prevalence of risk appetite.
The big question now is what drove the pound lower, and an overlay of several pound pairs clearly shows that the pound slumped hard across the board on Tuesday.
So, what happened on Tuesday? Well, as I reported during Tuesday’s London Session Forex Recap, the pound climbed higher across the board ahead of the U.K. CPI report and then broadly moved lower when the headline CPI reading came within expectations. I attributed this wonky forex price action to a case of “buy the rumor, sell the news,” or to be more specific, loading up on the pound ahead of the CPI report, and then dumping the pound when the report finally came out.
It seemed like an adequate assessment at the time, but the pound later went into full selloff mode when forex traders were apparently reminded of the upcoming Brexit-centered E.U. Summit after the Brussels-based CEEMET group released a very pessimistic report on the possible negative effects of a Brexit.
The pound’s forex price action became linked to Brexit news after that, jumping higher on Thursday when British Prime Minister David Cameron and top E.U. officials gave rather upbeat comments ahead of the E.U. Summit and then slumping for most of Friday when a deal failed to push through before rising higher during the late U.S. session when rumors began to fly about that a deal was finally hammered out. And as it turns out, a deal WAS hammered out.
As I noted above, the Japanese yen was rather strong, which is rather weird given the risk-on sentiment in the markets. Heck, the yen managed to win out against most of its forex rivals, slightly losing out only to the Loonie and the Aussie, as y’all can see below.
But what was driving demand for the yen? Let’s see if an overlay of several yen pairs can give us some clues.
Hmm. Looks like there were two periods of major yen strength.The first was on Tuesday and the second period was on Thursday and Friday. So, what was the major event on Tuesday? Well, the negative interest rate policy that the BOJ adopted during their most recent monetary policy decision finally came into effect. I don’t think that’s the true catalysts, however, since negative interest rates are supposed to weaken demand for the yen, not strengthen it. I think the main reason for yen strength at the time was the temporary return of risk aversion during the morning London session, due to retreating oil prices and concerns over the European banking sector.
As for the Thursday-Friday period, we have the Brexit-centered E.U. summit that I pointed out earlier. Forex traders who were uncertain on how the deal will go and how it will affect the markets were probably enticed to load up on the safe-haven yen.
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!