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 last week’s top movers?
Unless you’re a complete newbie or you were trapped in a cave somewhere, you probably already know that the UK voted in favor of a Brexit, which is obviously very bad for the pound, at least in the short-term.
But did you know that the euro suffered too, or that the Aussie and the Kiwi were actually doing quite well for the week?
GBP, EUR, JPY: Majority Vote in Favor of a Brexit
There were gaps on pound and euro pairs (well, most currency pairs for that matter) when the new trading week opened, thanks to mostly Brexit-related polls that were released during the weekend, which showed that voting sentiment appears to have swung in favor of the “remain” camp, as I detailed in Monday’s Asian session recap.
The gaps on most pound pairs were not filled until the end of the week since bullish sentiment on the pound remained strong, as more Brexit-related polls that favor the “remain” camp came out of the woodworks, easing Brexit jitters all the more.
The return of risk-appetite was not healthy for the lower-yielding euro, however, and most euro pairs also got smacked lower across the board when ECB Imperial Overlord Draghi testified before the European Parliament’s Economic and Monetary Affairs Committee on Tuesday (June 21, 2016), finally closing the gaps on all euro pairs.
Forex Gump already has a write-up on Draghi’s testimony, so read that here, if you want the details. The key statement that seems to have triggered the broad-based euro sell-off seems to have been Draghi’s statement that “Further monetary policy stimulus is in the pipeline,” which was apparently taken by the market as a promise that more easing was being prepared.
However, as Forex Gump asserts in his write-up, this statement was within the context of implementing the ECB’s targeted longer-term refinancing operations (TLTRO II), which was already announced way back in March when the ECB introduced its monetary stimulus package, and was therefore likely priced-in already.
And having read the entirety of Draghi’s testimony (I didn’t fall asleep, I swear), I’m inclined to agree with Forex Gump. I guess it just goes to show that the market is not always a rational animal, huh? Anyhow, Draghi also said in his testimony that “the ECB is ready for all contingencies following the UK’s EU referendum” and that the ECB will “act by using all the instruments available within [its] mandate, if necessary,” so keep that in mind now that the UK has voted for a Brexit.
Moving on, the euro later found enough buyers to give it support and it even began to steadily climb higher against most of its forex rivals, thanks to easing Brexit jitters due to even more anti-Brexit polls, which were being released even when the actual referendum was already underway, as I noted in Thursday’s morning London session recap.
What gibberish am I writing about, you ask? Well, just know that the UK accounts for around 17% of the EU’s economy, making it the second-largest contributor to the EU economy after Germany’s 20%. Also, the EU is a net exporter to the UK, so the EU actually benefits a lot from trade with the UK, and a Brexit would threaten this trading relationship.
And since betting odds and the polls were favoring the “remain” camp in the runup to and during the actual Brexit referendum, demand for euro-denominated assets (namely European equities) began to surge. And to buy euro-denominated assets, you naturally need to buy some euros, hence, the higher demand for euros.
This economic tie between the UK and the EU is also the reason why the euro got dragged down with the pound when the referendum results began coming out, favoring the “leave” camp to the shock and horror of the market players who were betting heavily against a Brexit.
The “leave” camp’s impending victory also sent a torrent of safe-haven flows to gold and the safe-haven currencies (JPY, CHF, USD), with the Japanese yen clearly being the safe-haven of choice since it won out against everything.
Interestingly enough, the euro and the pound’s slide both stopped when it became clear that the “remain” camp had won, as Forex Gump pointed out in another write-up. Even more interesting is that pound and euro pairs started to recover a bit during Friday’s morning London session when British Prime Minister David Cameron announced that he will step down by October. Whether the market took that as a positive thing, or it was just an amusing coincidence that pound and euro shorts were taking delicious profits off the table at the time, I’m not really sure.
Moving on, pound and euro pairs began trading sideways during Friday’s U.S. session, which makes me excited on what next week will bring.
By the way, the “remain” camp’s victory in the Brexit referendum does not mean the UK has already left the EU. The referendum was just a way to show how the people felt and what they thought about EU membership, which would then be the basis for the UK government to initiate the actual Brexit process, as provided for in Article 50 of the Treaty on European Union, as amended by the Lisbon Treaty.
And as usual, I’ll refer you to Forex Gump for the details on the actual Brexit process. I highly recommend that you read his write-up here because aside from the fact that it’s very informative, it’s also rather amusing to read, especially the latter parts.
AUD & NZD: Pre-Referendum Risk-Taking Hysteria
It’s not very clear from the table of Top 10 Movers of the Week, but the Kiwi and the Aussie actually did relatively well during the week. And as you can see on the tables above, the Kiwi actually won out against everything except the almighty yen while the Aussie won out against everything except the Kiwi and the yen.
I noted earlier that Brexit polls in the runup to the actual Brexit referendum caused betting odds and market expectations to shift against a Brexit, which fueled intense risk-taking as Brexit jitters waned.
Well, the main beneficiaries of all that risk-taking, aside from the pound and the euro, were the Aussie and the Kiwi, which are both higher-yielding comdolls. And as you can see on the charts above, Kiwi and Aussie pairs were steadily climbing higher from Monday to Thursday before the precipitous drop during Friday’s Asian session, especially against the safe-havens, when referendum results began to favor a Brexit.
And just for reference, here are how of the some of the major global equity indices fared as of Thursday when the risk-taking hysteria was at its highest:
- Japan’s Nikkei 225 (N225): up 4.09% for the week
- FTSEurofirst 300 (FTEU3): up 6.23% for the week
- DOW (DJI): up 1.89% for the week
- S&P 500 (SPX): up 2.03% for the week
Notice how optimistic the market was? Higher-yielding currencies like the Kiwi and the Aussie thrive in such environments. Now look at how they closed for the trading week and in the aftermath of the Brexit vote:
- Japan’s Nikkei 225 (N225): down 4.15% for the week
- FTSEurofirst 300 (FTEU3): down 0.83% for the week
- DOW (DJI): down 1.55% for the week
- S&P 500 (SPX): down 1.64% for the week
A significant shift in sentiment, wouldn’t you say? Just one day was enough to wipe out 4 days worth of gains and then some.
The profit-taking after the massive surge in demand for safe-haven currencies also benefited the Aussie and the Kiwi since they were able to recover their losses against the safe-havens, although they weren’t able to fully recover from the beating they got from the yen.
(Bonus) CHF: Sneaky SNB
As you can see on the table above, the Swissy ended up as the third worst-performing currency of the week, after the pound and the euro, even though it got a surge of buyers due to the Brexit vote.
And while profit-taking naturally took its toll on the Swissy like it did for the yen, it just so happens that the SNB was apparently weakening the Swissy as well. Heck, the SNB even admitted it, saying in an email that “The Swiss National Bank has intervened in the foreign exchange market to stabilize the situation and will remain active in that market.”
Do you think the pound’s fall is over, or it has just begun? Will risk aversion dominate this week, fueling demand for the safe-haven currencies? Will the SNB continue to intervene? Make sure to practice proper risk management of as always, okay?