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?
The main theme for this trading week was pound weakness (yet again). This marks the third week in a row that the pound got whipped, so those of you who have been short since the Brexit referendum is probably grinning from ear to ear right about now. Pound weakness wasn’t the only major theme, though, since we’ve also got yen and Kiwi strength.
Before we discuss what was driving price action on those currencies, below is this week’s scorecard. And as y’all can see, the yen was this week’s top dog since it gave all of its forex rivals the boot.
But as you’ll see later, the yen actually just barely won out against the Kiwi. And depending on your data feed, the Kiwi may have even edged out the yen, so let’s just say that they are tied, okay?
Having said that, 13.04% of you voted that the yen would be the top dog this week while 21.74% voted that the Kiwi will emerge triumphant, which means that 33.78% of those of you who voted would have ended the week with delicious profits, assuming you stuck with your trading bias throughout the week of course.
As you can see on the chart above, the pound’s weakness started during Tuesday’s Asian session. Some market analysts blamed BOE Carney’s press conference on the BOE’s Financial Stability Report, but I don’t buy it since the pound’s drop happened several hours before the press conference or the release of the report.
Carney’s press conference and the report likely fueled further declines for the pound, though, since they were pretty bleak, as the highlights below show.
- “The Bank is also able to provide substantial liquidity in foreign currency, if required”
- “some [Brexit-related] risks have begun to crystallise”
- “The current outlook for UK financial stability is challenging”
- Brexit is the “the most significant near-term domestic risks to financial stability“
- A Brexit could threaten “the financing of the United Kingdom’s large current account deficit” since it relies “on continuing material inflows of portfolio and foreign direct investment”
- A Brexit may be bad for the U.K.’s commercial real estate market since it “had experienced particularly strong inflows of capital from overseas”
- In response to the pro-Brexit vote, the BOE’s Financial Policy Committee eased capital requirement on banks by reducing the “countercyclical buffer rate from 0.5% to 0%” until a least June 2017
- This just means that British banks can loan out more money
The pound’s slide also obviously happened before the disappointing services PMI report came out (52.3 vs. 52.8 expected, 53.5 previous), so the catalyst has to be before the London session rolled around.
So what was happening before the London session opened? Well, Standard Life froze investor withdrawals from a £2.9bn commercial property fund that’s what. This act was enough to spook investors that they began withdrawing their funds from other commercial property funds that by the time the London session closed, three U.K. property funds were already telling their investors to “talk to the hand.” The situation worsened to the point that a total of six commercial property funds had suspended investor withdrawals by July 7.
Incidentally, there were no more suspensions after that, and as you can see on the chart above, the pound reached a bottom and began to trade mostly sideways (and even staged a little rally on some pairs), which helps to confirm that the fund suspensions were the main catalysts, with Standard Life’s suspension being THE prime catalyst. The question now is if this will continue to happen going forward.
Okay, but what does the pound have to do with commercial property funds, you ask? Well, as I listed in one of the bullet points for the BOE’s Financial Stability Report earlier, the U.K.’s commercial real estate market “had experienced particularly strong inflows of capital from overseas.”
If those foreign investors, who are indirectly invested in commercial property via one of the funds, decide to liquidate their holdings, which is what happened this week, and they then decide to take their money to another country, let’s say New Zealand, they will naturally dump the pound in favor of the Kiwi.
Not only that, an outflow of investor capital would require the actual selling of commercial property once the funds run out of cash reserves. If enough investors began screaming for their money back, the funds would be forced to sell their commercial property holdings at discount prices. And if enough funds start dumping commercial property, then you get a firesale, although that’s what the suspensions are meant to stop.
Also, 55% of domestic loans of British banks are tied up with commercial property, and massive dumping of commercial properties could lead to losses and non-performing loans, with the end game being a full-blown financial crisis.
Okay, enough with the doom and gloom. Another possible (but less likely) catalyst was the uncertainty due to the U.K. Conservative Party elections for the next British PM since the preliminary ballot started on July 5 and ended on July 7, with Theresa May (anti-Brexit) and Andrea Leadsom (pro-Brexit) as the last two contestants left in a battle to the death, er, I meant in a political battle for the job of PM. Sorry, I got a bit overdramatic there.
Getting back on topic, Conservative Party members will then vote who among the two remaining contenders will become the second female PM after Margaret Thatcher, but we won’t be getting the results until September 9.
I guess we can look forward to more Brexit-related volatility when the two candidates start detailing their plans related to an actual Brexit and the future of the U.K. in general, huh?
Whether it was uncertainty due to the British PM elections, or the Australian 2016 elections, or the U.K.’s commercial property market, the end result is still the same – lots and lots of risk aversion, which is really good for the safe-haven yen, as you can see on the chart above.
As you can also see, demand for the yen began to weaken on Wednesday’s U.S. session, thanks to returning appetite for risk, although the yen’s price action became more mixed after that, since it gave way to the Aussie and the Kiwi but continued to dish out the pain against pretty much everything else after a brief correction, which is rather interesting since the signs of returning risk appetite usually convince forex traders to dump the yen very hard. I dunno if it’s just me, but it seems like forex traders are unwilling to let go of the yen just yet.
As you can see on the table above, the Kiwi really gave the yen a difficult time since they’re essentially tied.
And as you can see on the chart above, the Kiwi was able to resist the prevalence of risk aversion on Monday, thanks to a broad-based commodities rally on speculation that China will be introducing more stimulus, as I discussed on Monday’s London session recap. However, the Kiwi ultimately succumbed come Tuesday, before bottoming out on Wednesday when signs of risk-taking began to emerge.
The Kiwi then began to spurt higher across the board on Thursday, and the major catalyst that was cited by many market analysts was RBNZ Deputy Governor Grant Spencer’s July 7 speech, since Spencer said that:
“[F]urther reductions in the OCR could pose a risk to financial stability through their effect on credit growth and house prices. While the outlook for CPI inflation will ultimately determine the future path of monetary policy, the trade-off against financial stability risk needs to be carefully considered.”
In short, the RBNZ is really reluctant to cut rates further, which quite naturally killed off rate cut expectations. I personally found the reaction weird because the RBNZ almost spelled out the same thing when it released its Annual Statement of Intent over a week before. Heck, Forex Gump even wrote a lengthy review on it (read it here), and I even mentioned it in last week’s Top Forex Market Movers.
It’s just an educated guess on my part, but I think the market reacted the way it did because most forex traders didn’t bother to read the RBNZ’s Annual Statement of Intent, or if they did, they didn’t quite pick up on what the RBNZ was heavily implied, and this is evident when you look at the lack of explosive price action when the RBNZ’s Annual Statement of Intent was released.
Anyhow, the 31.25% of you who became long-term bullish and the 18.75% of you who became short-term bullish on the Kiwi after reading up on Forex Gump’s review of the Annual Statement of Intent probably have a really smug smile on your faces right about now. Just make sure to trail your stops, okay?
The Other Currencies
Here are the tables on how the other currencies fared this week:
The euro and the Greenback’s price action were obviously very mixed, although the Greenback’s violent reaction to the June NFP report is worth noting. Forex Gump has more on that, so read his review of the June NFP report here, if you’re interested.
Moving on, the Loonie’s vulnerability to most of its forex rivals was due to weaker oil prices, as you can see below. As to why oil was sliding lower, market analysts cited various reasons, but the most commonly cited are weak seasonal demand, oversupply jitters due to another round of increased U.S. oil rigs, and uncertainty over the pro-Brexit vote.
As for the Aussie, most Aussie pairs had similar price action to Kiwi pairs, except that Aussie pairs started the week by gapping lower due to uncertainty over the Australian elections and the RBA statement. Also, the Aussie didn’t get a bullish boost on Thursday.
Interestingly enough, the Aussie was actually winning out against the Kiwi before RBNZ Spencer’s speech, as you can see on AUD/NZD’s chart below.
In fact, the Aussie ended up losing out to the Kiwi precisely because of Spencer’s speech, so those of you who were bullish on AUD/NZD now know who you have to blame.
Although S&P’s downgrade of Australia’s growth outlook from stable to negative likely softened up the Aussie’s defenses before Spencer’s speech, so you might as well blame S&P too.
As for the Swissy, it lost out to everything except the pound, as you observed on the table above, but its price action was a total mess, as you can see on the chart below, so there’s no clear driver, although I wouldn’t be surprised if the SNB is sneakily weakening the Swissy again.