The forex trading week has come and gone, so it’s time once again to take a look at what was driving forex price action.
Were you able to profit from any of this week’s top movers?
Woah! 7 out of the top 10 movers are yen pairs, with the yen losing badly, so it’s pretty clear that yen weakness was the dominant theme this week.
As for the secondary theme, we’ve got pound strength. So, what was driving forex price action this week?
The yen was the weakest currency of the bunch during the trading week. And we can probably thank the lack of safe-haven demand this week due to the prevalence of risk appetite, given that most of the major global equity indices were well in the green.
- Nikkei 225 (N225) is up by 3.45% to 16,925.68 for the week
- Hang Seng (HSI) is up by 1.56% to 23,266.70 for the week
- FTSEurofirst 300 (FTEU3) is up by 1.94% to 1,378.94 for the week
- Euro Stoxx (STOXX50E) is up by 2.34% to 3,080.74 for the week
- FTSE 100 (FTSE) is up by 0.83% to 6,894.60 for the week
- DAX (GDAXI) is up by 0.91% to 10,683.82 for the week
- Nasdaq Composite (IXIC) is up by 0.59% to 5,249.90 for the week
- DOW (DJI) is up by 0.52% to 18,491.96 for the week
- S&P 500 (SPX) is up by 0.50% to 2,179.98 for the week
It’s worth pointing out that signs of risk appetite were already beginning to show on Monday, but it wasn’t until Tuesday’s Asian session rolled around that the yen bulls finally gave up the ghost. So, did something happen then?
Well, the yen bulls apparently began to flee when Japanese Chief Cabinet Secretary Yoshihide Suga said in a Reuters interview that the government will respond “appropriately” to further yen gains.
Also, Shinzo Abe’s adviser, Koichi Hamada, said that the BOJ may start buying foreign bonds in order to weaken the yen as an additional measure or if direct currency intervention is met with opposition.
The latter statement by Hamada was later refuted by BOJ Member Yukitoshi Funo on Wednesday, but the yen bulls were incapable of presenting any form of organized resistance by then, so the yen’s rout persisted for the rest of the week.
The pound reigned supreme for the second consecutive week. And as y’all can see on the chart above, the pound had a mixed start on Monday but showed some signs of weakness, likely due to profit-taking while London traders were away on holiday.
However, most pound pairs got fresh buyers starting on Tuesday’s London session. There were only low and mid-tier items on the forex calendar, and they were slightly disappointing, so the bullish push was likely a continuation of the past couple of weeks’ theme of buying up the pound on easing Brexit-related jitters and lower rate cut expectations.
Wednesday was a repeat performance, albeit even more broad-based since even the Greenback, which was showing signs of strength at the time, finally lost out to the pound. Thursday is even more interesting because that’s when the pound’s bullish push became a bullish onslaught.
And we (those of us who were bullish on the pound anyway) can thank Markit’s manufacturing PMI report for that because the reading for August jumped from July’s 41-month low of 48.3 to an 11-month high of 53.3.
Commentary from the PMI report was also very upbeat. There were, for example, “solid inflows of new work from both domestic and export sources, the latter aided by the sterling exchange rate.” Also, employment levels “rose for the first time during the year-to-date” and “Manufacturing production increased at the fastest pace in seven months.”
Basically, the PMI report is saying that there’s nothing very bad happening in the U.K. just yet. In fact, things appear to have gotten even better, thereby reinforcing the theme that everything’s okay.
The U.K.’s construction PMI reading was also released later on Friday, and it climbed higher from July’s 85-month low of 45.9 to a three-month high of 49.2 in August. In addition, the commentary from the PMI report was pretty optimistic.
It’s still below the 50.0 stagnation level, though, so it wasn’t as awesome as the manufacturing PMI reading. Also, forex traders were waiting for the NFP report at the time, so pound pairs barely reacted when the report was released.
Interestingly enough, the pound actually benefited from the NFP report, but this was likely due to the surge in risk appetite brought about by the NFP report since the pound mainly delivered a pounding against the safe-havens while finding more resistance from the comdolls.
Another interesting bit is that the pound was the only currency other than the Loonie that managed to hold out against the Greenback when dollar bulls later returned.
Oh, also note that Markit’s services PMI will be released on Monday. Maybe it will also reinforce the theme that everything’s A-okay in the U.K., eh? Or maybe it will finally give pound bulls a reason to take some profits off the table? Either way, it’s worth watching.
The Greenback slowly but surely extended its gains from last week, likely on continued optimism after Yellen’s hawkish Jackson Hole speech.
Unfortunately, that optimism was challenged on Thursday when the ISM manufacturing PM report came out worse-than-expected (49.4 vs. 52.0 expected, 52.6 previous) just a day before the NFP report.
And when the NFP report finally came out, it ended up being a disappointment across the board, so the Greenback also got dumped across the board yet again.
Interestingly enough, Greenback bulls started to jump in despite the poor NFP report. The damage was already done on most Greenback pairs, though, particularly with the pound and the comdolls.
Forex Gump has a more detailed write-up on the details of the NFP report, as well as the likely reason for this wonky price action.
The gist of it all is that the CME Group’s Fedwatch Tool showed lower probabilities for a September and November rate hike, but the probability of a December rate hike increased in the aftermath of the NFP report.
Forex Gump attributed the lower chance for a rate hike in September or November to the slowdown in wage growth. But since NFP saw a net increase of 151K, which is above the 100K needed to keep up with population growth, the poor reading is therefore still “very encouraging,” as Atlanta Fed President Dennis Lockhart would put it. In short, a December rate hike is still in the cards, or at least the market still thinks that it is.
And to, er, “borrow” Forex Gump’s closing line, “it would be interesting to see whether or not the market will maintain its views next week.”
The Loonie was mixed but showed mostly weakness from Monday to Thursday, as Loonie pairs tracked oil lower on renewed oversupply jitters.
However, oil benchmarks spiked higher on Friday thanks to a mix of profit-taking after a week-long slump and a Bloomberg interview with Russian President Vladimir Putin wherein Putin said that he may recommend another oil freeze deal with Saudi Deputy Crown Prince Mohammed bin Salman.
- U.S. crude oil up (CLG6) by 2.46% to $44.22 per barrel on Friday
- Brent crude oil up (LCOH6) by 2.60% to $46.63 per barrel on Friday
Aside from the spike in oil prices, the Loonie also very likely got a boost from the good news that Canada’s trade deficit narrowed in July to $2.5B from $4.0B.
According to the trade report, the narrower deficit was largely due to the 3.4% increase in total exports, with exports to the U.S. increasing by 3.3% to $32.5 billion.
The upbeat trade report likely fueled speculation that the BOC won’t be cutting rates again soon and may even have a more upbeat tone in next week’s BOC statement.
CHF & EUR vs. NZD & AUD
I lumped the four currencies together and divided them between two camps because their price action was rather messy but mostly in line with risk sentiment during the week.
As such, the Swissy and the euro got whupped while the higher-yielding Aussie and Kiwi got some buyers due to the prevalence of risk appetite during the week.
A few things worth pointing out here, though. First, the ECB meeting is coming up next week, so we may get to see some euro action. Also, we’ve got the RBA statement next week, so make sure to keep an eye on the Aussie as well.
Incidentally, the euro lost to the Swissy while the Aussie lost to the Kiwi, probably because forex traders were wary of being too exposed on the euro and the Aussie ahead of their respective central bank statements next week.
This week’s scorecard: