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 this week was relatively more subdued when compared to last week’s trading frenzy. Anyhow, U.S. dollar strength and weakness on the part of the Kiwi and the Aussie were the main themes this trading week. So, what was driving forex price action this week?
The Kiwi dollar got another mighty good beating this trading week. And as you can see on the chart above, it got its butt kicked on three occasions.
The Kiwi felt the pain early on Monday, thanks to the release of New Zealand’s Q2 CPI readings, which missed both the consensus readings from economists, as well as the RBNZ’s own forecasts, thereby renewing rate cut expectations.
- Q2 CPI q/q: 0.4% vs. 0.2% previous, 0.5% consensus, 0.6% RBNZ forecast
- Q2 CPI y/y: 0.4% vs. 0.4% previous, 0.5% consensus, 0.6% RBNZ forecast
The Kiwi got whipped again on Tuesday when the RBNZ released a consultation paper that discussed the risk of a housing bubble in New Zealand, as well as listing some proposals on how to counter the said risk of a housing bubble.
What does this have to do with the Kiwi and why did the Kiwi drop, you ask? Well, listen closely my young Padawan. You see, the RBNZ really wants to cut rates in order to help inflation pick up and scare away some forex traders who have been buying up the Kiwi, as well as support the heavily indebted dairy sector (New Zealand is literally a land of milk and Manuka honey).
And while cutting rates would make loans cheaper, which would certainly help the dairy industry, it would also encourage even more housing loans, thereby worsening the risk of a housing bubble.
The RBNZ is therefore left in a lose-lose situation, and this consultation paper and its proposals show that the RBNZ is trying to squirm away from this lose-lose situation by finding a means to keep housing loans in check, which may then give the RBNZ some breathing space to cut rates. In short, the consultation paper increased rate cut expectations, which is why the Kiwi dropped yet again.
Moving on, the final nail on the Kiwi’s coffin (for this week at least) was the release of the highly anticipated RBNZ economic update, which I mentioned in last week’s Top Forex Market Movers of the Week.
Forex Gump already wrote a detailed review on the update, so read it here, if you’re interested. The gist of it all, though, is that the RBNZ is worried about inflation and the strong Kiwi, saying that “A decline in the exchange rate is needed.” The RBNZ also seemed more determined about cutting rates, saying that:
“At this stage it seems likely that further policy easing will be required to ensure that future average inflation settles near the middle of the target range.”
So there you have it! Now you know about the three main catalysts that kicked the Kiwi lower to end up as the weakest currency of this trading week.
The Aussie was the second-weakest currency of the week, and as you can see on that there chart, the bulk of the Aussie’s losses were incurred during Tuesday’s early Asian session.
So what was happened then? Well, the Aussie first got slapped lower across the board, thanks to the slide in iron prices at the time, which was attributed by some market analysts to oversupply jitters and concerns over weaker demand due to China’s slowdown.
And for the newbies out there who are wondering what iron ore has to do with the Aussie and Australia, just know that iron ore is one of Australia’s major exports, accounting for about 25% or so of Australia’s total exports. It’s basically what oil is to an oil-producing country like Canada.
Getting back on topic, the Aussie’s broad-based decline on Tuesday began to accelerate when the RBA released the minutes for its June meeting. I’ll refer you yet again to Forex Gump for the details on what the RBA had to say but the most important thing that you need to know about is that the RBA’s overall tone was rather dovish.
Also, the RBA is expecting Q2 GDP growth to slow down a bit after an impressive performance in Q1. Moreover, the RBA even sounded like it was open to further easing moves, saying that it is ready to “make any adjustment to the stance of policy that may be appropriate” depending on how “further information on inflationary pressures, the labour market and housing market activity” in the run-up to the August RBA meeting turn out.
And now we come to this week’s champion – the almighty U.S. dollar. Unfortunately, there was no clear catalyst for the Greenback’s strength, and you can see that for yourself by looking at how messy that overlaid chart of various Greenback pairs is.
The likely reason for the Greenback demand throughout the week was probably due to monetary policy divergence. To be more specific, the U.S. Fed is the only major central bank that’s still looking to hike rates, so it’s like an oasis in the dry desert, or a light in the darkness, or some other clichéd analogy or metaphor that you can think off.
If you look at the other major central banks, the BOE already switched to an easing bias due to the Brexit referendum. And while the ECB decided to maintain its current policy this week, it did say that it “continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases,” so clearly the ECB has an easing bias.
The BOJ, meanwhile, is expected to announce some form of monetary policy stimulus to match Japanese PM Shinzo Abe’s planned fiscal stimulus package. And we already discussed earlier the RBNZ’s desire to cut further, as well as the RBA’s openness to further easing.
What’s left? Oh, that’s right! The BOC was rather neutral in the latest BOC statement, but it’s certainly in no position to hike rates. As for the SNB, well, it has been fending off safe-haven flows by directly intervening in the forex market (*cough* currency manipulator *cough*) and implementing negative rates since the Swissy appreciated tremendously when the SNB removed the floor on EUR/CHF last year.
Speaking of monetary policy, it’s also possible that forex traders were opening preemptive positions ahead of the next week’s FOMC Statement, so keep a close eye on the Greenback and make sure to lock in some profits or adjust your stops, just in case the Fed sounds overly dovish or does something unexpected.
Here are the tables on how the other currencies fared this week:
The more noteworthy currencies are the Loonie, the yen, and the pound. Price action on the euro and Swissy, meanwhile, were actually pretty messy, and they seem to have benefited most from opposing currency price action.
The Loonie’s overall weakness was mostly due to the slide in oil prices during the week, which was attributed by market analysts to renewed oversupply jitters on reports that the number of U.S. oil rigs has increased for the fourth straight week, although the Greenback’s strength during the week was probably a reason as well since a stronger U.S. dollar means that globally-traded commodities, which are usually denominated in U.S. dollars, are now relatively more expensive and therefore less desirable.
- U.S. crude oil down (CLG6) by 3.74% to $44.23 per barrel for the week
- Brent crude oil down (LCOH6) by 3.95% to $45.73 per barrel for the week
Another currency worth noting is the yen. And while the yen was mixed for the week, it initially showed broad weakness before some BOJ-related shenanigans went down during Thursday’s morning London session, as I noted in my session recap.
To paraphrase (i.e. to copy-paste) what I said in my recap, rumors began to circulate that BOJ officials were not too committed to further monetary stimulus, according to unnamed people who are “familiar with the discussions,” which caused the yen to appreciate.
Later, in a clear act of sorcery or an incredible coincidence, the BBC aired a recorded interview of BOJ Kuroda saying that there is “no need and no possibility for helicopter money,” which appears to have confirmed the earlier rumors, causing the yen to appreciate some more.
However, Reuters later came out with a report saying that Kuroda’s interview was conducted in mid-June, which was before Japanese PM Shinzo Abe announced his planned economic stimulus or expectations began to spread that the BOJ will be implementing some form of the so-called “helicopter money,” thereby capping the yen’s gains.
The pound ended the week mixed as well, but it depreciated sharply and broadly on Friday, thanks to the special edition of Markit’s PMI report, which is meant to give a glimpse on how the Brexit vote is beginning to impact business sentiment and the overall U.K. economy.
The U.K.’s manufacturing PMI came in at 49.1, which is better than the 48.7 consensuses, but worse than the pre-referendum reading of 52.1 and a 41-month low to boot. The U.K.’s services PMI, meanwhile, came in at 47.4, much worse than the expected 48.8 reading and the previous month’s 52.3, as well as an astounding 88-month low.
Commentary from the PMI report also noted that “Manufacturing output and new orders both fell for the first times since the opening quarter of 2013.” The service sector got it even worse since “Services activity and new orders both fell at the quickest rates in over seven years, with series-record month-on-month drops in the respective index levels.” The sudden and substantial slowdown in both the manufacturing and service sectors were attributed to “ongoing uncertainty pre- and post-EU referendum, with reports especially prevalent among service providers.”
Overall, it was bad, really bad. The question now is if the pound’s weakness will persist next week or not.
Here’s this week’s scorecard: