The forex trading week has come and gone. Time to take a look at what was driving forex price action. Were you able to profit from any of this week’s top movers?
Well, it looks like pound weakness was the name of the game this week, given that 6 out of the top 10 movers are pound pairs, with the pound showing weakness all the way. Aside from that, demand for the Japanese yen was also a major theme. Okay, let’s look at what was driving price action for these and the other currencies, shall we?
The safe-haven yen dominated its forex rivals for the second week running, thanks to another bout of risk aversion that plunged most of the major global equity indices into the red, with the clear exception of U.S. equities.
- Nikkei 225 (N225) is down by 2.25% to 16,519.29 for the week
- Hang Seng (HSI) is down by 3.17% to 23,335.59 for the week
- ASX 200 (AXJO) is down by 0.80% to 5,296.70 for the week
- FTSEurofirst 300 (FTEU3) is down by 2.31% to 1,328.49 for the week
- Euro Stoxx (STOXX50E) is down by 3.91% to 2,933.75 for the week
- FTSE 100 (FTSE) is down by 0.98% to 6,710.28 for the week
- DAX (GDAXI) is down by 2.81% to 10,276.17 for the week
- Nasdaq Composite (IXIC) is up by 2.31% to 5,244.57 for the week
- DOW (DJI) is up by 0.21% to 18,123.80 for the week
- S&P 500 (SPX) is up by 0.53% to 2,139.17 for the week
Oh, if you’re wondering why the yen weakened against its peers from Tuesday’s Asian session until Wednesday’s morning London session, that was likely due to some jawboning by Japanese Finance Minister Taro Aso, as I noted in Tuesday’s Asian session recap.
Risk aversion was beginning to return by then after being banished for a while when Fed Governor Brainard delivered her dovish comment, which poured cold water on rate hike expectations. Incidentally, Brainard’s dovish statement is one of the major reasons why U.S. equities were able to finish strong despite the prevalence of risk aversion everywhere else.
Other than Taro Aso’s efforts at talking down the yen, market analysts were also pointing to reports that the BOJ may cut negative rates even deeper or at least hint that they would in next week’s BOJ statement. However, risk aversion persisted, and so the yen gained strength once more.
The poor pound got another round of pounding. Initially, the pound was mixed while trading roughly sideways against most of its peers from Monday to Wednesday, as you can can see on the chart above.
However, it began to dip during Wednesday’s late Asian session, probably because of preemptive positioning ahead of the MPC statement. And when the BOE’s MPC finally announced its monetary policy decision and released the minutes of its meeting, pound bulls and pound bears began fighting it out, with the bears having a slight advantage. This slight advantage was later turned into a complete victory for the pound bears come Friday, despite the lack of negative catalysts for the pound.
As to why pound bulls and pound bears were fighting it out, with the bears ultimately winning, well, that’s because the BOE’s MPC members acknowledged that the U.K.’s economy did not become as apocalyptic as many economists predicted, including the BOE’s own economists.
But at the same time, “The Committee’s view of the contours of the economic outlook following the EU referendum had not changed” from the August Inflation Report, which is a fancy way of saying that BOE officials still expect the U.K.’s economy to deteriorate.
The BOE then said that it would reassess its economic outlook when it compiles the November Inflation Report. Things then turned grim (for the pound) because the BOE warned that if the assessment for November is still in line with the August inflation report, then “a majority of members expected 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.” In short, the BOE still has an easing bias. Also, we can expect another rate cut if the BOE’s forecasts don’t improve.
Anyhow, Forex Gump has a write-up on the other details of the BOE statement, so go ahead and read it here.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Greenback was the second best-performing currency of the week. And as highlighted on the chart above, the Greenback strengthened across the board on two separate occasions.
The Greenback actually had a weak start, thanks to lowered rate hike expectations due to the dovish statement from Fed Governor Brainard that I mentioned earlier. By the way, if you’re interested on what Brainard had to say, you can check out Forex Gump’s write-up here. That write-up also includes the most recent speeches and/or interviews of the other voting FOMC members, so you may wanna read it ahead of next week’s FOMC statement.
Getting back on topic, the Greenback gained strength on Tuesday, even though there weren’t any major catalysts. But as noted earlier, the yen was out of commission at this time as a safe-haven at this time, so it’s possible that the safe-haven flows went to the Greenback instead.
The Greenback then steadily weakened after that as the yen began to recover, although the disappointing reading for U.S. retail sales (-0.3% vs. -0.1% expected, 0.1% previous) likely helped to weigh down the Greenback as well.
However, the Greenback finally found salvation when the CPI reading for August came in better-than-expected (0.2% vs. 0.1% expected, 0.0% previous), which caused the probability of a December rate hike to jump from 47.4% to 55%, according to the CME Group’s FedWatch Tool. Admittedly, however, rake hike probabilities for the September and November meetings were unaffected.
The Loonie was the second-weakest currency, and Loonie bears can thank the hard slump in oil prices during the week for that.
- U.S. crude oil down (CLG6) by 5.78% to $43.23 per barrel for the week
- Brent crude oil down (LCOH6) by 4.14% to $46.02 per barrel for the week
Oil benchmarks suffered most of their losses on Tuesday and Wednesday, although Friday was pretty painful, too. So, what’s up with oil prices, you ask? Well, Tuesday’s slump was apparently due to reports that the International Energy Agency (IEA) changed its forecast that demand for oil will overtake supply by the end of the year. Instead, the IEA revised its forecast in its September report to say (emphasis mine):
“Our forecast in this month’s report suggests that this supply-demand dynamic may not change significantly in the coming months. As a result, supply will continue to outpace demand at least through the first half of next year.”
Ouch! It gets even worse because OPEC also revised its own forecasts to be more in line with that of the IEA. Wednesday’s drop, meanwhile was due to an inventory buildup of oil products, especially gasoline. As for the slide on Friday, that was mainly attributed to the increase in Iranian exports, although the increase in the number of U.S. oil rigs likely helped to weigh down on oil and the Loonie as well.
NZD, AUD, CHF, & EUR
I decided to lump these currencies together because price action on the four of ‘em were pretty choppy, with no clear drivers. It’s also pretty clear that there was little interest on these four currencies when you look at the tables above and see which currency pairs had the smallest % changes. Heck, you can even check out your own charts to see that many Aussie, Kiwi, euro and Swissy pairs were essentially trading sideways during the entire week. I mean, just look at how messy price action was on the Swissy below.
There was slightly more demand for the Swissy, probably because of its status as a safe-haven amid the risk-off vibes during the week. Forex traders even ignored the SNB’s promise (or threat) that it would “remain active in the foreign exchange market, as necessary” during the SNB monetary policy decision. Oh, make sure to keep an eye on the Kiwi since the RBNZ statement is coming up.
Okay, here’s this week’s scorecard:
And here’s last week’s poll results:
The 14.75% of you who chose the yen got it right, although the 34.42% of you who were rooting for the Greenback likely did well, too. I just hope that the 24.59% of you who chose the pound were able to switch your bias. After all, the bulk of the pound’s losses occurred on Friday in the aftermath of the BOE statement, so you should have had enough time to adjust your stops, abandon ship, or even switch your bias.
Now that you know what the likely drivers were last week, and having taken a look at the forex calendar for the upcoming week, which currency do you think will come out on top? Vote in the poll below!