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 there were a lot of themes during this trading week, with Aussie, Kiwi, and Loonie strength and Swissy, yen, and euro weakness being the noticeable ones. Hmm. That’s a clear divide between the higher-yielding comdolls and the lower-yielding currencies. Time to find out what drove forex price action this week!
Global Equities Rally Hard
- Shanghai Composite (SSEC) closed 3.12% higher for the week
- Japan’s Nikkei 225 (N225) closed 6.49% higher for the week
- Hong Kong’s Hang Seng (HSI) closed 8.96% higher for the week
- FTSEurofirst 300 (FTEU3) closed 3.54% higher for the week
- DAX (GDAXI) closed 4.46% higher for the week
- DOW (DJI) closed 1.82% higher for the week
- S&P 500 (SPX) closed 1.62% higher for the week
I know, I know. Risk aversion was the dominant sentiment on Friday, but risk appetite was the overwhelmingly dominant sentiment for most of the week, and those bullet points above showing global equity indices closing higher prove it.
And since risk appetite was the dominant risk sentiment, it therefore naturally follows that higher-yielding currencies (AUD, CAD, NZD) were in high demand while the lower-yielding currencies (EUR, CHF, JPY) were down in the dumps.
The appetite for risk that dominated most of the week was likely triggered by China’s lower-than-expected CPI readings on Monday, which apparently sparked speculation that China may need to introduce more stimulus soon, according to analysts.
The lack of safe-haven demand during Monday’s earlier sessions and jitters over the U.S. earnings season during Monday’s U.S. session caused the Greenback to weaken, which led to a commodities rally that encouraged even more risk-taking on Tuesday.
Risk appetite then continued to reign on Wednesday, thanks to the release of China’s trade data, which showed signs that the economic behemoth was stabilizing, with exports increasing for the first time since June of last year since exports soared by a whopping 11.5%.
The risk-on sentiment then held steady on Thursday before finally being banished on Friday, as oil benchmarks began to sink lower ahead of Sunday’s oil freeze meeting in Doha, which also convinced market players to take some profits off the table to avoid weekend risk.
Another likely reason for the lack of risk-taking on Friday was China’s Q1 2016 GDP report, which came in as expected at 6.7%. However, this is slower than Q4 2015’s 6.8% expansion and a seven-year low to boot, which probably caused market players to be more skittish.
Okay, we’ve got the big picture covered, so let’s focus on the weakest and the strongest currencies during the week. Let’s discuss the strongest currency first, and that currency happens to be the Aussie since it won out against all of its forex rivals, as you can see on the table below.
So, what drove the Aussie to outperform its fellow higher-yielders? The very likely answer to that is…
Australia’s Jobs Report
- Employment change: +26.1K vs. +17.0K expected, -0.7K previous
- Jobless rate: 5.7% vs. 5.9% expected, 5.8% previous
- Labor force participation rate: held steady at 64.9% vs. uptick to 65.0% expected
Forex Gump concluded in his preview for Australia’s March jobs report that “the leading labor indicators are painting another mixed picture, but they are now more skewed towards a potential upside surprise,” so the lucky forex traders who read that were probably able to prepare well and take advantage of the actual upside surprise for Australia’s jobs report.
Specifically, Australia’s economy was able to generate a net increase of 26.1K jobs, which is higher than the expected 17.0K net increase. The increase in employment was apparently enough to push the jobless rate lower from 5.8% to 5.7%, which is awesome because the consensus was that it will worsen to 5.9%.
The labor force participation rate failed to tick higher, though, but traders were apparently not paying attention to that since Aussie pairs began climbing higher across the board. Heck the Aussie even began giving its fellow higher-yielders a nice beat-down after trading mostly sideways against them from Monday to Wednesday, as you can see on the chart below. Although it probably helped that iron ore was in rally mode at the time as well.
Now that we’ve covered the mighty Aussie, let’s take a look at the weakest currency of the week, which just so happens to be the Swissy.
So, why was the Swissy such a sissy this week? Unfortunately, there are no clear answers to that since there were no major economic reports for the Swissy during the week and market analysts aren’t really talking about the Swissy much.
We do have a clue, however, since the bulk of the Swissy’s weakness occurred on the latter half of Tuesday and most of Wednesday, as I’ve highlighted on the chart below. Moreover, the Swissy’s weakness was across the board, so it’s pretty safe to assume that the Swissy’s weakness was inherent and not due to opposing currency price action.
Cool! So, what happened then? Well, there were..
News About Poland’s Mortgage Conversion Crisis
What the heck is that and what the heck does that have to do with the Swissy, you ask? Well, let me tell you a story.
Once upon a time, in the country of Poland, there were many foreign banks who controlled around 60% of banking assets in Poland. These foreign banks were capitalized in euros and borrowed in euros, so they were naturally a bit worried about issuing loans in zlotys, which is the local Polish currency, since they would be exposed to additional currency risk.
These clever banks thought long and hard on how to pass on their currency risk to the Polish borrowers. These bank knew that the Swiss National Bank (SNB) enforced a 1.2000 floor on EUR/CHF and they also knew that Switzerland had one of the lowest interest rates in Europe, which meant a stable exchange rate and lower costs for these banks to boot, so they decided to offer loans denominated in Swiss francs to the Poles.
The Poles didn’t mind at the time since the loans seem cheap. In addition, the Polish real estate bubble had not yet burst and the zloty was relatively strong, so half a million Polish households happily decided to take mortgages denominated in Swiss francs in the belief that they were getting a good deal.
Alas, all of Europe was engulfed in a financial crisis, which sent an exodus of frightened market players to the sweet embrace of the safe-haven Swissy. This sudden and relentless surge in safe-haven demand made defending the 1.2000 floor on EUR/CHF unbearable for the SNB. Finally, on January 15, 2015, the SNB called it quits and removed the 1.2000 floor on EUR/CHF, causing the Swissy to appreciate tremendously like water rushing out of a broken dam.
Unfortunately for the half a million Poles who borrowed in Swiss francs, this meant that their loans were now significantly more expensive (more than double in some instances), having ballooned to around $42 billion. Ouch!
In response to the plight of these Polish borrowers, the Polish government under President Andrzej Sebastian Duda proposed a law back in January that would force the banks to convert the Swiss-denominated loans into zlotys. And it just so happens that an amended draft of that law is expected to come out as early as next week, so there was a lot of buzz about it from media outlets like the Financial Times, especially on April 13 for some reason.
Perhaps that fueled speculation on how the forced conversion would affect the Swissy. $42 billion is a pretty big amount, after all. Of course, I could be wrong and the SNB was just clandestinely weakening the Swissy yet again.
Do you think these market themes were enough to spark longer-term forex trends? Better keep them in mind when planning your trades for next week!