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 looks like pound weakness was this week’s main theme, given that 7 out of the top 10 movers were pound pairs, with the pound losing out. Other than that, we’ve also got Loonie strength as a major theme this week. So, what was driving forex price action?
The pound steadily extended its losses during the course of the week to end up as the worst-performing currency. And while there were a few low to mid-tier economic reports for the U.K. this week, none of them really had an explosive impact on the pound’s price action.
One thing worth noting, though, is that pound pairs started sliding uniformly lower on Tuesday. And most analysts attributed that to reinforced rate cut expectations after BOE MPC Member Ian McCafferty wrote in an op-ed for the Times that:
“If the economy proves to have turned down in line with the initial survey signals, I believe that more easing is likely to be required, but that can easily be delivered in coming months.”
“Bank Rate can be cut further, closer to zero, and quantitative easing can be stepped up.”
But as I noted in the Tuesday morning London session recap, this wasn’t really new since the BOE stated almost exactly the same thing during the MPC statement:
“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.”
“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.”
The pound’s broad weakness appears to be linked to last week’s BOE MPC decision, wherein the BOE went above and beyond a widely expected rate cut while providing clear (yet conditional) forward guidance on monetary policy.
Oh, there was also an interesting report about the BOE failing to meet its bond-purchase target on Tuesday, but that didn’t seem to have a very significant impact on the pound and it was apparently resolved by Wednesday.
Unlike last week, there were no top-tier economic reports for Canada during this week, so the Loonie was able to track oil’s price action in relative peace. And since oil benchmarks closed higher for the week, Loonie pairs naturally got some lovin’ as well.
- U.S. crude oil up (CLG6) by 6.99% to $44.72 per barrel for the week
- Brent crude oil up (LCOH6) by 6.60% to $47.19 per barrel for the week
Rhetoric from Mohammed Al Sada, Qatar’s energy minister and OPEC president, about the dip in oil prices being temporary and plans for an informal talk in September appear to have been the prime catalysts for the oil rally this week.
The Greenback’s overall weakness also made commodities like oil relatively cheaper, which probably encouraged some bargain-buying. Not only that, Khalid al-Falih, the Saudi energy minister, also said that OPEC members will discuss how to stabilize the oil market during the informal talks in September. Moreover, the International Energy Agency (IEA) also projected that the oil glut will ease in the latter half of 2016, which spurred further demand for oil.
In short, bargain-buying and speculation on the tightening of the oil market, as well as expectations that OPEC members will be able come up with a way to stabilize oil prices were driving demand for oil this week.
The market’s optimism on oil was so positive that oil benchmarks just pushed higher, even though there were negative reports like the seventh consecutive week of increases in U.S. oil rigs, Saudi daily oil output rising to record levels, and an increase in U.S. oil stockpiles.
The Other Currencies
Here is how the other currencies fared this week:
Looking at the chart above, the Greenback had a mixed performance on Monday, probably because forex traders were still mulling on whether the NFP report would be enough to convince the Fed to hike within the year.
However, the Greenback later began to broadly weaken when Tuesday’s U.S. session rolled around. And many analysts attributed this to the poor non-farm productivity reading (-0.5% vs. +0.5% expected, -0.6% previous).
Normally, that economic indicator is considered a mid-tier item at best. But as revealed in the June FOMC minutes, most Fed officials “judged that they would need to accumulate additional information on the labor market, production, and spending” before considering hiking rates further, which is probably why the Greenback started retreating on the poor reading.
Moving on, the Greenback later had another mixed performance on Thursday before flattening out during most of Friday, as forex traders waited for the retail sales report. And as it turns out, the retail sales readings for July were a thorough disappointment, so the Greenback plunged across the board.
- July headline retail sales m/m: 0.0% vs. 0.4% expected, 0.8% previous
- July core retail sales m/m: -0.3% vs. 0.2% expected, 0.9% previous
A quick glance at the retail sales report shows that vehicle sales soared by 1.3% (0.5% previous), but 8 out of the 12 other retail store types reported a decline in sales, offsetting the large increase in vehicles sales, which is the reason why the headline reading was flat while the core reading came it at -0.3%.
And looking at the CME Group’s Fedwatch Tool, the retail sales report actually caused rate hike expectations to ease. The probability of a September rate hike, for example, was down to just 9% from 12% a day before.
The Greenback’s slight recovery after the initial drop was therefore just likely profit-taking by dollar shorts after a week of weakness for the Greenback. Still, I could be wrong and this may be the start of a rebound, so make sure to keep an eye on the Greenback, especially since we’ve got the CPI readings and the FOMC meeting minutes for next week.
The low weekly percentage change for most Kiwi pairs imply that either the Kiwi was asleep for the week or that Kiwi pairs were being influenced more by opposing currency price action, but as you can see on the chart, there was actually plenty of intraweek action.
Forex traders were initially buying up the higher-yielding Kiwi, likely because of the prevalence of risk appetite at the time. The Kiwi then surged higher when the RBNZ announced that it was cutting the OCR by 25 bps to 2.00%. Wait, what? Yep, that’s right. The Kiwi did dip a bit on the rate cut decision before skyrocketing, but the dip was shallower than usual. The Kiwi’s gains were quickly capped, however, and the Kiwi then spent the rest of the weak by slowly sliding lower.
Forex Gump has a write-up on the RBNZ statement, as well as RBNZ Governor Wheeler’s press conference, so read that here, if you want the details.
The gist of it is that the rate cut was widely expected and the RBNZ did not provide any other easing measure, which is why the Kiwi rallied. The Kiwi’s gains were quickly capped, however, likely because the RBNZ is still looking to cut rates further, saying that:
“Our current projections and assumptions indicate that further policy easing will be required to ensure that future inflation settles near the middle of the target range.”
Wheeler also avoided answering a question during the press conference on whether the RBNZ plans to intervene in the forex market or not, saying instead that: “let me not comment further at this point about whether we’re intervening or not.” And as Forex Gump pointed out, Wheeler usually denies any plans of intervening.
I don’t know for sure whether or not the market is also considering the possibility of an intervention from the RBNZ, but it appears as if the RBNZ is getting desperate already. For one, the RBNZ slashed the OCR even though the problem with the potential housing bubble had not yet been addressed.
Another is that New Zealand doesn’t have a problem with growth. It does have a problem with inflation, however, and this inflation problem is partially due to the Kiwi’s persistent strength. Related to this is the finding that private retail banks apparently only pass on 5-10 points of a 25 bps rate cut. Not only that, private retail banks also take advantage of the cheaper money from the RBNZ by increasing their own deposit rates, which naturally attracts foreign investors and is likely why the RBNZ’s rate cuts aren’t really all that effective when it comes to weakening demand for the Kiwi.
Given all that, it appears as if the RBNZ is stuck between a rock and a hard place, so it may get desperate enough to trigger its so-called “stoplight” intervention system, or at least introduce some other move to weaken the Kiwi.
Looks like the Kiwi is therefore another currency worth keeping an eye on next week, if only to see whether the Kiwi’s slide will continue or a rebound will occur.
Aussie pairs had roughly similar price action to Kiwi pairs, but there was a reversal of fortunes in that the Aussie was the one that was more vulnerable to dips this week. As for the likely reason for the Aussie’s vulnerability, we can probably blame the slide in iron ore prices for that. September Chinese iron ore futures (62% content), for example, were down by 1.61% to $58.18 per dry metric ton for the week.
The downturn in iron ore prices was being blamed by some analysts to speculation that the iron ore rally is not sustainable, which sounds like some kind of circular reasoning. Anyhow, it also probably didn’t help that a report was released which shows that Australia may be losing some of its market share as other players are enticed into iron ore production.
The Japanese yen was mixed for the week, so opposing currency price action seems to have been the main driver for most yen pairs. However, there was a very noticeable, albeit weird, event on Friday. To be more specific, the yen strengthened when the U.S. retail sales report was released, as you can see on the chart above.
What’s up with that? Well, that was likely due to souring risk sentiment after the poor retail sales report was released, which sent some safe-haven flows towards the yen at the expense of all its forex rivals. After all, most European equity indices did turn negative after the retail sales report was released. U.S. equity indices, meanwhile, were mixed but mostly in the red.
- Euro Stoxx (STOXX50E) closed 0.07% lower to 3,046.80 on Friday
- FTSEurofirst 300 (FTEU3) closed 0.20% lower to 1,362.88 on Friday
- DAX (GDAXI) closed 0.27% lower to 10,713.43 on Friday
- DOW (DJI) closed 0.20% lower to 18,576.47 on Friday
- S&P 500 (SPX) closed 0.08% lower to 2,184.05 on Friday
- Nasdaq Composite (IXIC) closed 0.09% higher to 5,232.90 on Friday
EUR & CHF
Nothing really noteworthy about the two currencies since price action for their respective currency pairs appear to have been influenced more by opposing price action. And while the euro appears to be the third strongest currency of the week, the low weekly percentage change for euro pairs, as well as the mixed price action, as you can see on the charts above, indicate that the euro was being influenced more by opposing currency price action.
Okay, here’s this week’s scorecard:
And here’s last week’s poll results:
Oh boy, looks like most of you were bullish on the Greenback while 14% of you were bullish on the pound, so I sure hope you were able to change your bias or get out quick at least. To the 4% of you who voted for the Loonie, congratulations, assuming you maintained your bias throughout the week. Another 4% of you voted for the Kiwi. Hopefully you were able to use the RBNZ statement to get out of you positions with maximum profit. Otherwise, you would have given most of your profits back.
Now that you know what the likely drivers were this week, and having taken a look at the forex calendar for next week, which currency do you think will come out on top next week? Vote in the poll below!