The forex trading week has come and gone.
Time to take a look at how the currencies moved and see what got’em going.
Don’t let the small net percentage change fool you, since there was actually plenty of intraweek volatility.
Anyhow, Yen’s strength and Loonie’s weakness were the main themes this week. So, what was driving price action for these and the other currencies?
The yen had a reversal of fortune from being the previous week’s worst-performing currency to this week’s top dog. And yen bulls can thank the prevalence of risk aversion this week, given that most of the major equity indices were in the red.
- Nikkei 225 (N225) is up by 0.24% to 16,965.76.68 for the week after opening 1.21% higher on Monday
- ASX 200 (AXJO) is down by 0.86% to 5,339.18 for the week
- FTSEurofirst 300 (FTEU3) is down by 1.38% to 1,359.87 for the week
- Euro Stoxx (STOXX50E) is down by 0.89% to 3,052.29 for the week
- FTSE 100 (FTSE) is down by 1.71% to 6,776.95 for the week
- DAX (GDAXI) is down by 1.03% to 10,573.44 for the week
- Nasdaq Composite (IXIC) is down by 2.36% to 5,125.91 for the week
- DOW (DJI) is down by 2.20% to 18,085.45 for the week
- S&P 500 (SPX) is down by 2.39% to 2,127.81 for the week
And as I highlighted on the chart above, the bulk of the yen’s gains were captured on Tuesday and Wednesday when there was a broad-based demand for the yen.
The yen’s strength on Tuesday was very likely due to safe-haven flows when risk sentiment turned sour in the late European and U.S. equity markets after the disappointing release of ISM’s U.S. non-manufacturing PMI.
The yen then got hit by another wave of buyers during Wednesday’s Asian session after a report from Sankei began to circulate, revealing that there was apparently no consensus among BOJ officials on what to do in the next BOJ meeting, which eased expectations of further easing. Well, that’s what some analysts say anyway.
Anyhow, the yen’s gains were later capped on the same day before becoming more mixed come Thursday when BOJ officials began coming out of the woodworks. One noteworthy BOJ official with something to say was BOJ Deputy Governor Hiroshi Nakaso, who said: “Depending on economic, price situations and financial conditions, further measures may still be deemed necessary.”
However, unnamed sources interviewed by Reuters on Friday said that there was still no consensus, which stoked yen demand once more. The yen lost out to the Greenback, though, but we’ll talk about that later.
Oil benchmarks were able to end the trading week with some gains, as you can see below.
- U.S. crude oil up (CLG6) by 2.88% to $45.72 per barrel on Friday
- Brent crude oil up (LCOH6) by 2.20% to $47.86 per barrel on Friday
So why the heck was the Loonie the worst-performing currency of the week, yo!? Well, we can probably blame the BOC’s rate decision for that, since Loonie pairs decoupled for a while from oil prices, as you can see on the chart above.
As expected, the BOC decided to keep rates on hold. However, the BOC also sounded a bit dovish, saying that “risks to the profile for inflation have tilted somewhat to the downside since July.”
In addition, the BOC warned that GDP likely contracted in Q2, although it tried to put on an optimistic face by saying that a rebound in Q3 is expected. Still, “the ground lost over previous months raises the possibility that the profile for economic activity will be somewhat lower than anticipated in July.” In simple English, Q3 GDP growth will likely miss the BOC’s own forecast.
After the temporary decoupling, Loonie pairs began to more or less track oil prices again on Thursday and Friday. By that time, oil was already on the decline, initially due to profit-taking after oil prices jumped on the good news that U.S. oil inventories unexpectedly dropped, signaling higher demand.
However, the decline in oil prices later became a full-blown rout after reports emerged that U.S. oil rigs increased yet again and that the unexpected drop in U.S. oil inventories this week was apparently due to a storm.
Interestingly enough, the higher-than-expected increase in net employment (+26.2K vs. +14.0K expected, -31.2K previous) was just shrugged off by Loonie pairs.
Sure, the jobless rate ticked higher to 7.0% instead of staying put at 6.9%, but the labor force participation rate also ticked higher from 65.4% to 65.5%, ending four straight months of deterioration in the participation rate.
Also, the net increase in employment was due to the 52.2K increase in full-time jobs more than offsetting the 26.0K decrease in part-time jobs.
One noteworthy bit that most analysts seem to have missed, though, is that most of the jobs gain was actually government jobs (+57.0K). The private sector only generated 8.3K jobs, with most of the losses coming from self-employed individuals (-39.1K).
The large increase in government jobs was therefore able to mask the weak increase in private sector jobs. And the weak job generation from the private sector is not exactly a very good sign for the Canadian economy.
The Greenback had a mixed performance this week but doesn’t immediately mean that it was being dragged around by opposing currency price action since there was some rather uniform price action, as you can see on the chart above.
The Greenback started the week on a weak footing, likely because of profit-taking after the previous week’s wonky reaction to the poor NFP report. The Greenback was then swamped by a deluge of sellers when ISM’s non-manufacturing PMI reading for August came in at 51.4, significantly missing expectations that it would gently slide from 55.5 to 55.4.
Not only that this was the weakest reading since March 2014, so there’s that, too.
Buyers finally began to support the Greenback on Thursday. Incidentally, the yen was beginning to weaken at this time, even though risk aversion persisted, so it’s possible that some of those safe-haven flows made their way to the Greenback.
Friday was also another good day for the Greenback, thanks to optimistic statements from Fed officials, which sent bond yields to their highest levels since late June on rate hike expectations, according to analysts. This is confirmed by the jump in rate hike probabilities, according to the CME Group’s FedWatch Tool.
By the way, if you’re puzzled as to what bond yields have to do with currencies, check out our School’s lesson on How Bond Yields Affect Currency Movements.
The pound finally bowed out after three weeks of strength, as well as being the champion of the past two weeks. And apparently, the pound’s downfall was due to BOE Guv’nah Mark Carney’s testimony before the Treasury Committee.
Sure, Carney admitted that the U.K.’s economy was doing better compared to the BOE’s forecasts, but Carney also reiterated that the BOE will take “whatever action is needed” to keep the economy supported.
Whether that was the actual trigger or was just used as an excuse by the bulls to take delicious profits off the table is not clear, since the U.K. also got slapped with a couple of disappointing economic reports before Carney took the mic.
First up was the House Price Index (HPI) from Halifax, with the reading for August coming in at -0.2% month-on-month (-0.1% expected, -1.0% previous) and 6.9% year-on-year (7.0% expected, 8.4% previous). The monthly reading marks the second straight month of declines while the annual reading is the weakest increase since November 2013. And both readings imply that the housing market in the U.K. is beginning to cool down in the aftermath of the Brexit referendum.
The other disappointing economic report was the 0.9% contraction in manufacturing output, which is bigger than the expected 0.3% decline and the poorest reading since July 2015. Looking at the details of the report, the decline in manufacturing output was broad-based, with only the food manufacturing and textiles and machinery industries reporting an expansion.
Again, I’m not sure if the pound’s decline this week was due to profit-taking or fresh shorts coming in. Make sure to keep an eye on the pound, though, since we’ve got the BOE statement coming up next week.
CHF & EUR
Like the safe-haven yen, the Swissy and the euro were also likely buoyed by the prevalence of risk aversion during the week. One thing worth pointing out here is that the ECB’s decision to maintain its current monetary policy was a dud for the euro, as I noted in Thursday’s London session recap.
However, it triggered a wave of risk aversion that persisted until Friday, giving the euro, the yen, and the Swissy a boost. Also, speculation on what the ECB will do (or not do, in this case) probably allowed the euro to win out against the Swissy since the euro was actually losing out to the Swissy from Monday to Wednesday.
We’ve also got the SNB monetary policy statement, but that’s usually a dud. Still, keep an eye on that event and the Swissy.
The Kiwi had a good run during the first three days of the week, thanks to a relatively sparse forex calendar and a broad-based commodities rally that allowed the higher-yielding comdoll to just shrug off the risk-off vibes.
The Kiwi wasn’t invulnerable, though, so Kiwi pairs also began to tank when risk aversion persisted while the commodities rally began to stall before ultimately ending on Friday.
The Aussie was also enjoying the commodities rally, but the fun and games ended early for the Aussie, thanks to the disappointing reading for Australia’s Q2 GDP report, which printed a quarter-on-quarter growth of 0.5%. This is slower than Q1’s 1.0% increase and is also the poorest quarter-on-quarter expansion in four quarters.
Aside from the poor headline reading, the quarter-on-quarter growth was powered by the 15.5% jump in government investment (+0.7% previous), followed by the 1.9% increase in government spending.
Consumer spending, meanwhile, moderated a bit (0.4% vs. 0.7% previous), while business investment continued to slump by 12.4%.
What does all that mean? Well, the Australian economy was kept afloat by the government. If government spending and investment are stripped away, Australia’s economy would have actually contracted by 0.5%.
Also, the fact that the Australian economy was kept afloat by the government is not a good sign for the private sector.
Anyhow, the Aussie began trading roughly sideways after the GDP report was released before succumbing on Thursday.
This week’s scorecard: