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 another round of pounding for the pound was the main theme this week. We also got Swissy and yen weakness as secondary themes as well as demand for the comdolls, although the latter probably is not that clear from the list of Top 10 Mover of the Week. So, what drove forex price action this week?
GBP: Brexit Vote Fallout & Carney’s Statement
The pound started the week by gapping lower across the board in the aftermath of the previous week’s pro-Brexit vote, before sinking even lower during Monday’s Asian and European sessions.
The bears were beginning to show signs of fatigue by the time Monday’s U.S. session rolled around, though, and the bulls began their counter-attack not long after, during Tuesday’s Asian session, on the back of rallying oil prices. This counter-attack then became a full assault during Tuesday’s morning London session, as jitters over the pro-Brexit vote began to fade and European equities began to recover.
The bullish offensive on the pound persisted throughout Wednesday, shrugging off credit rating downgrades and other mostly negative Brexit-related developments before finally beginning to lose steam when Thursday came around, likely because forex traders were wary of being too exposed when BOE Guv’nah Mark Carney delivers his piece during Thursday’s U.S. session.
And boy did Carney deliver (for the pound bears) because he said in his prepared speech that “the economic outlook has deteriorated and some monetary policy easing will likely be required over the summer.” Caney clarified that this is his personal view, however, and that he doesn’t speak for the other BOE-MPC members. Moreover, he said that the BOE will be making an initial assessment during the July meeting, so further easing moves by July is highly unlikely. Carney also didn’t say what easing tool he plans to use, so a rate cut is not guaranteed, which is probably why the pound only continued sliding down slowly after the initial drop.
Global Equities Bounce Back
- Shanghai Composite (SSEC) closed 2.74% higher for the week
- Japan’s Nikkei 225 (N225) closed 4.89% higher for the week
- Hong Kong’s Hang Seng (HSI) closed 2.64% higher for the week
- FTSEurofirst 300 (FTEU3) closed 3.46% higher for the week
- U.K. FTSE 100 (FTSE) closed 7.15% higher for the week
- DAX (GDAXI) closed 2.29% higher for the week
- DOW (DJI) closed 3.15% higher for the week
- S&P 500 (SPX) closed 3.10% higher for the week
Global equities are considered risky assets, so demand (or lack thereof) for equities show the dominant risk sentiment in the global markets. And since most of the major global equity indices were well in the green, we can safely conclude that the prevalent risk sentiment was risk appetite.
As to what was driving risk appetite during the week, I already mentioned that fears over the pro-Brexit vote have began to ease earlier. And if y’all can still recall last week’s Top Forex Market Movers, I noted back then that the “leave” camp’s victory during the Brexit referendum caused risk sentiment to shift suddenly, wiping out several days’ worth of gains (and then some) in the global equities market.
It therefore follows that easing Brexit fears would entice some bargain hunters to start jumping in. And when what was initially thought to be a correction turned out to be a full-fledged relief rally, given that the British government is apparently in no hurry to trigger Article 50 of the TEU and central banks looked like they’re ready to support their respective economies, the shorts likely decided to call it quits and cover their positions.
The prevalence of risk appetite also drew a battle line between the safe-haven currencies and the comdolls, with the safe-havens quite naturally getting a smack down from the higher-yielding comdolls, as I’ll be showing below.
Safe-havens (JPY, CHF, USD)
As you can see on the table above, the Swissy lost to everything, excepting the pound, while the yen was able to edge out a win against the Swissy, but got trounced by everything else other than the pound. The Greenback’s performance, meanwhile, is a bit more mixed, but clearly shows that it lost out to the comdolls.
It’s trivia at this point, but the Swissy started showing weakness during Monday’s morning London session when risk aversion was running rampant, as I noted in my session recap. And I attributed this wonky price action to the release of the SNB’s domestic sight deposit numbers, since it showed a very noticeable increase from 416,535 million Swiss francs to 423,466 million.
To those who aren’t familiar with sight deposits, just know that sight deposits are, well, deposits that are relatively easy to withdraw and transfer. And sight deposits in domestic Swiss banks form part of the monetary base, so they are one of the main tools used by the SNB for currency purchases (*cough* market manipulation *cough*). The increase therefore shows that the SNB really did walk the talk after announcing last week that it was intervening in the forex market due to the pro-Brexit vote, which likely spooked some Swissy bulls.
Comdolls (NZD, AUD, CAD)
Based on the above tables, the Kiwi and the Loonie were essentially neck-and-neck with the Aussie behind the two of them.
The comdolls were initially on the back foot at the start of the week, thanks to the risk-off vibes on Monday, but eventually began to take back lost ground from most of the other currencies.
It is interesting to note that intraweek price action shows that the Kiwi and the Aussie were the go-to higher yielding currencies when risk appetite finally did return on Tuesday, since both comdolls climbed higher against the Loonie, as you can see on the charts below.
As to why the Kiwi and the Aussie are the go-to comdolls, well, they both offer higher-yields compared to the Loonie, for one. Another more in-depth reason was cited by Forex Gump when he reviewed the RBNZ’s Annual Statement of Intent, which you can read here.
In particular, Forex Gump cited New Zealand Finance Minister Bill English in the latter part of his write-up as saying during an interview with Bloomberg that New Zealand is “in a very small group of countries – the others being Iceland, South Korea and Australia – that have got a combination of reasonable government finances, a reasonable growth path, and room for interest rates to move.” English then added that “Relative yield in New Zealand just remains better, and that’s held up longer and stronger than people might have expected.”
And if y’all can still remember last week’s Top Forex Market Movers, both the Aussie and the Kiwi were able to hold their ground when risk aversion slammed into the markets as the “leave” camp began to emerge victorious during the Brexit referendum, which goes to show how resilient the two currencies are.
Demand for the Aussie may get tested next week, though, since we’ve got the RBA statement coming up on Tuesday (July 5, 4:30 am GMT).
I already discussed all the other major currencies, so I might as well discuss the euro as well. And as you can see on the table above, the euro was mixed but mostly on the winning side.
It couldn’t hold its ground against the comdolls, but it was able to score wins against the safe-haven currencies, even though the euro is also a lower-yielding currency. And demand for the euro was likely due to easing Brexit jitters. If you’re confused as to why, just remember that a Brexit would also hurt the Euro Zone since the E.U. is a net exporter to the U.K., so calming nerves over the pro-Brexit vote also eased bearish demand for the euro. Not only that, easing Brexit jitters also means more demand for euro-denominated assets.
Do you think these market themes and events will continue to play out next week? Better keep them in mind when planning your trades for next week!
And this is the scorecard for this week:
Which currency do you think will reign supreme next week? Share your thoughts by voting in the poll below!