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?
Well, it seems like a lot of themes were playing out this week. But if we use the average absolute volatility for the week as a filter, we can more clearly see that the main theme was Aussie strength followed by Greenback strength and yen strength.
And while the pound’s average weekly volatility doesn’t stand out too much, there was actually heavy intraweek price action, which I’ll show later. So, what was driving forex price action this week?
I told y’all in last week’s Top Forex Market Movers of the Week to “keep an eye on the Aussie next week since chances are good that it will be a top loser or winner next week.” I was saying that in the context of the RBA statement. But as it turns out, something else was driving the Aussie’s forex price action. Although the Aussie still emerged as the top dog of the week.
So what was driving demand for the Aussie? Well, we can thank the surge in iron ore prices during the week for that. Chinese August iron ore futures (62% content), for instance, were up by 5.23% to $60.19 per dry metric tonne for the week. And the surge in iron prices was due to increased demand from Chinese steel mills and higher steel prices, according to some analysts.
Oh, for the newbies out there, iron ore accounts for around 25% of Australia’s total exports. Basically, iron ore is to Australia as oil is for oil-exporting countries like Canada. And a rise in iron ore prices is therefore good for the Australian mining companies and the Australian economy as a whole, hence the stronger Aussie.
Going back to the RBA statement, Aussie pairs did dip a bit when the RBA announced a rate cut. And as y’all probably saw on the chart earlier, Aussie pairs were actually sliding lower on Monday, which was before the Tuesday RBA statement. It must be noted that iron ore was already starting its climb on Monday, so the Aussie’s slide on the same day was very likely due to preemptive positioning ahead of the RBA statement.
It’s therefore highly probable that forex traders used the actual RBA statement to unwind on their preemptive shorts, sending the Aussie higher, especially since the RBA was actually a bit upbeat on the economy other than inflation and the housing market, as Forex Gump pointed out in his write-up. Basically, the Aussie also probably benefitted from a “sell the rumor, buy the fact” event.
The Japanese yen was the second-strongest currency after the Aussie. And as y’all can see on the chart above, the bulk of the yen’s gains were captured on Tuesday?
The Tuesday yen rally was apparently sparked by the Japanese government’s approval of a ¥13.5 trillion ($132 billion) fiscal measure as part of Japanese PM Shinzo Abe’s massive ¥28.1 trillion ($265.30 billion) economic stimulus package.
The yen rallied on this announcement likely because the stimulus package was already announced on July 27 of the previous week. Moreover, the announcement was actually a disappointment since only ¥7.5 trillion of the ¥13.5 trillion fiscal measures are allocated for new spending. Furthermore, only ¥4.6 trillion of the ¥7.5 trillion new spending are earmarked for the current fiscal year.
To recap, new spending for the year is only a fraction of the pre-announced ¥28.1 trillion package, which is a real disappointment and made market players doubt the effectiveness of the stimulus package.
It also probably helped that risk aversion was on the rampage at the time, as I noted in my morning London session recap.
As y’all can observe on the chart above, the Greenback was horribly mixed before jumping higher across the board when the July NFP report was released. Forex Gump already has a detailed write-up on the NFP report. And you can read it here.
The gist of it all is that the seasonally adjusted readings were almost a total blowout. Non-farm employment increased by 255K, which is more than the expected 180K.
Wages also grew at a faster rate. And while the jobless rate held steady at 4.9%, the participation rate ticked higher, so “the U.S. economy was able to absorb the influx of workers who joined or rejoined the labor force,” as Forex Gump puts it.
Forex Gump also pointed out that the solid numbers were enough to revitalize rate hike expectations. And he cited the jump in rate hike probability according to the CME Group’s FedWatch Tool.
One detail from Forex Gump’s write-up that I would like to highlight is that the seasonally unadjusted reading for non-farm employment actually declined in July.
The solid reading for the seasonally adjusted reading was therefore due to, er, well, seasonal adjustments.
Forex Gump cited this disparity, together with profit-taking, as likely reasons for the broad-based dip before the week ended. And to, er, “borrow” from Forex Gump’s write-up, “I guess we’ll know what the market finally thinks about the NFP report in next week’s price action for the U.S. dollar.”
The pound suffered most of its losses on Thursday, thanks to the BOE statement. Forex Gump already has a write-up on that, so go ahead and read it here.
The short of it is that the BOE slashed the main rate by 25 bps as expected, but the BOE went above and beyond. To be more specific, the BOE also restarted its QE program, expanding its government bond purchases by £60 billion to £435 billion. The BOE also expanded its target asset class to include corporate bonds, with £10 billion allocated for such purchases.
Furthermore, the BOE also launched a Term Funding Scheme (TFS) that’s meant to provide funding to banks at or close to the current main rate of 0.25%. This measure is intended to help the real economy by allowing businesses and households to more directly benefit from the rate cut.
The bad news for the pound doesn’t end there, since the BOE also released its quarterly Inflation Report. And the inflation report showed that the BOE downgraded several economic indicators. For instance, GDP growth was downgraded, thanks to the expected weakening in consumer spending and business investment. The jobless rate was also expected to worsen over time. CPI was expected to temporarily overshoot the BOE’s 2% target, though, thanks to the weaker pound which will result in higher import costs.
Moving on, the BOE also provided some rather blatant forward guidance when it said that:
“If the incoming data prove broadly consistent with the August Inflation Report forecast, a majority of members expect to support a further cut in Bank Rate to its effective lower bound at one of the MPC’s forthcoming meetings during the course of the year.”
Moreover, the BOE made it clear that:
“The MPC can act further along each of the dimensions of the package by lowering Bank Rate, by expanding the TFS to reinforce further the monetary transmission mechanism, and by expanding the scale or variety of asset purchases.”
So there you have it! The BOE did more than was expected and is open and ready to do even more if needed. Given all that, it’s no wonder why the pound collapsed as rapidly as it did.
In last week’s Top Forex Market Movers of the Week, I attributed the Swissy’s strength back then to positive reports for Credit Suisse and UBS, which are Switzerland’s two biggest banks, since the positive reports boosted confidence in the Swiss economy.
Having said that, did you notice on the chart above that the Swissy’s decline started on Tuesday? What happened then, you ask? Well, Credit Suisse and Deutsche Bank were delisted from the blue-chip Euro Stoxx 50 equity index that’s what.
Credit Suisse is the second-largest bank in Switzerland, so its delisting due to the fall in market cap was likely a painful blow to confidence in the Swiss economy.
Of course, it’s also always possible that the SNB was sneakily weakening the Swissy again.
The Loonie was mixed but was tracking oil for the most part. However, most Loonie pairs decoupled from oil on Friday, thanks to Canada’s disappointing jobs report. Net employment change in Canada declined by 31.2K when it was expected to increase by 10.2K. The jobless rate also worsened to 6.9% as expected. What made the decline in employment really bad was that the fall was due to a whopping loss of 71K full-time jobs, which was partially offset by the increase in 40K part-time jobs.
The Kiwi was mixed for the week, although most Kiwi pairs had similar price action to Aussie pairs, albeit noticeably more subdued and more vulnerable to dips. This subdued price action was likely due to forex traders being wary of being too exposed on the Kiwi ahead of next week’s RBNZ statement.
Nothing really worth noting about the euro other than that it had yet another mixed performance this week. The euro’s price action was therefore likely being influenced more by opposing currency price action rather than any inherent demand (or lack thereof) for the euro.
Here’s this week’s scorecard: