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 last week’s top movers?
Looking at the table above, we can see that 5 out of the top 10 movers are Aussie pairs. And the Aussie is winning out in all of ‘em. The main theme for this trading week is therefore clearly about Aussie demand.
As for secondary themes, we’ve got pound and Greenback weakness, as well as yet another strong week for the yen. So, what was driving forex price action?
The Aussie just steamrolled almost all of its forex rivals last week. However, it did have a harder time against the yen, but we’ll talk about that later.
The forex calendar for the Aussie was relatively sparse and the RBA’s meeting minutes turned out to be neutral overall, so forex traders turned to risk sentiment for direction.
And the dominant sentiment the week was risk appetite since almost all of the major global equity indices closed in the green, as you can see on the bullet points below. Quite naturally, demand for the higher-yielding Aussie was also high.
- Nikkei 225 (N225) is up by 1.42% to 16,754.02 for the week
- Hang Seng (HSI) is up by 1.50% to 23,686.48 for the week
- ASX 200 (AXJO) is up by 2.54% to 5,431.30 for the week
- FTSEurofirst 300 (FTEU3) is up by 2.34% to 1,359.58 for the week
- Euro Stoxx (STOXX50E) is up by 3.35% to 3,033.60 for the week
- FTSE 100 (FTSE) is up by 2.97% to 6,909.43 for the week
- DAX (GDAXI) is up by 3.41% to 10,626.97 for the week
- Nasdaq Composite (IXIC) is up by 1.17% to 5,305.75 for the week
- DOW (DJI) is up by 0.76% to 18,2613.45 for the week
- S&P 500 (SPX) is up by 1.19% to 2,164.69 for the week
Aside from the upbeat risk sentiment, the Aussie was also likely riding the climb in iron ore prices. And for the newbies out there who are puzzled about what iron ore has to do with the Aussie, just know that iron ore accounts for around 25% of Australia’s total exports.
Basically, iron ore is to Australia what oil is to oil-exporting countries like Canada. A rise in iron prices is therefore good for the Australian mining companies, and by extension, the Australian economy and the Aussie.
The Aussie finally put an end to two weeks of yen domination. But as I said earlier, the yen really put up a fight against the Aussie. Heck, the yen even managed to end up as the second-strongest currency of the week, which is impressive.
The yen’s strength is even more impressive when you also consider that risk appetite was the dominant sentiment. So, what allowed the safe-haven yen to just shrug off the risk-friendly environment?
Well, we can probably thank the BOJ statement for that.
The gist of it all though is that the BOJ refrained from cutting rates, so the yen initially strengthened. However, the BOJ said that it still has options for easing and it also revamped its monetary policy framework.
And one of those changes includes abandoning its QE target of increasing the monetary base by ¥80 trillion per year while hinting that it could ease much further if needed.
Below is what the BOJ specifically said with regard to that (emphasis mine):
“The Bank will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI (all items less fresh food) exceeds the price stability target of 2 percent and stays above the target in a stable manner. Meanwhile, the pace of increase in the monetary base may fluctuate in the short run under market operations which aim at controlling the yield curve.”
Those statements, as well as the other tweaks to the BOJ’s monetary policy framework and threats of further easing, caused the yen to weaken while making the global equities market jump for joy.
However, a closer look at the BOJ statement shows that the BOJ did not actually ease further. And while the BOJ did abandon its QE target, it also said that its Japanese government bond (JGB) purchases would remain “more or less in line with the current pace” of ¥80 trillion per year. In short, the BOJ’s framework was changed, but the overall policy was basically the same.
Some market analysts attributed this lack of action to the BOJ’s fear of easing further. And the market appears to have smelled the BOJ’s fear, since the yen regained strength, even though the risk appetite was pretty strong.
However, risk-taking persisted on Thursday, thanks to the Fed’s own lack of action in the most recent FOMC statement, so demand for the safe-haven yen began to abate.
But luckily for yen bulls, risk aversion finally made a comeback on Friday after being banished for four straight days, so demand for the safe-haven yen picked up once again. Whoa! That rhymes!
The pound got another beat-down last week, which means that the pound has been getting its butt kicked for three weeks running now.
And as I highlighted on the chart above, the pound broadly weakened on two separate occasions. The first was from Monday to Wednesday. There weren’t any major catalysts at the time, so the pound’s weakness was likely a continuation of last week’s theme.
And if you can’t remember anymore, or if you just can’t be bothered to click that link, then just know that the BOE maintained its easing bias in its most recent BOE MPC statement. And the BOE still has an easing bias because it still expects that the U.K.’s economy will deteriorate due to Brexit.
Moving on, the pound’s price action became more mixed on Thursday. However, the pound’s broad-based weakness resumed on Friday. There wasn’t a catalyst for the pound’s weakness on Friday, but some market analysts are blaming it on British Foreign Secretary Boris Johnson’s statement about starting the negotiations for an actual Brexit “probably in the early part” of 2017, which renewed Brexit fears.
The pound’s slide started long before Johnson’s statement began to circulate, though, so I don’t completely buy it. Although it could have helped sustain the pound’s weakness.
Like the Aussie, the Kiwi is also considered a higher-yielding currency. But why did the Kiwi get a mighty good beating instead, you ask?
Well, the Kiwi was also actually enjoying the risk-on mood on Monday and the first half of Tuesday. However, Kiwi pairs got trounced by shorts when the Global Dairy Trade (GDT) auction finally ended. The price of dairy products did increase by 1.7%, but some market analysts argued that the market was expecting more after the 7.7% and 12.7% jumps during the two previous auctions. The dairy auction was therefore a swing and a miss, which is likely why the Kiwi slumped.
And for those of you who are wondering why I’m talking about milk and the Kiwi in one breath, well, just know that concentrated milk alone accounts for 18% of New Zealand’s exports. I guess you can say that New Zealand’s economy is literally powered by milk (and tourists who want to gawk at Hobbits).
Getting back on topic, the Kiwi got swamped by more sellers starting on Thursday. And Kiwi bears can thank the RBNZ’s monetary policy statement for that.
According to the RBNZ, there were no problems with growth, but New Zealand’s inflation problem persists. The RBNZ even warned that “Annual CPI inflation is expected to weaken in the September quarter.” And the Kiwi’s strength in the recent past doesn’t help any, since “the high exchange rate continues to place pressure on the export and import-competing sectors and, together with low global inflation, is causing negative inflation in the tradables sector. A decline in the exchange rate is needed.”
Given New Zealand’s inflation problem, the RBNZ concluded that:
“Monetary policy will continue to be accommodative. 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.”
The RBNZ has always been wary of cutting further because of the chance that it would cause a housing bubble. But in its most recent statement, the RBNZ said that “There are indications that recent macro-prudential measures and tighter credit conditions in recent weeks are having a moderating influence” in the housing market. In short, the RBNZ is hinting that it may soon have enough room to cut further.
Overall, the recent RBNZ statement seems to be a turnaround from the August 23 speech penned by RBNZ Guv’nah Wheeler wherein Wheeler argued that cutting rates too soon and too often is gonna be bad for New Zealand.
The Greenback was a net loser last week. And Greenback bulls can blame the BOJ and the Fed for that.
As you can see on the chart above, the yen’s strength after the BOJ statement really put the hurt on the USD/JPY. Not only that, the bearish pressure on USD/JPY apparently also weighed down on the other Greenback pairs, causing them to dip slightly.
However, the main catalyst that really dished out the pain on Greenback pairs (except NZD/USD and USD/JPY) was the FOMC statement.
The short of it all, though, is that while the Fed did say that “the case for an increase in the federal funds rate has strengthened” and that 3 Fed officials are now voting for a rate hike, the Fed still refrained from hiking rates yet again.
And for reference, there are only two FOMC meetings left this year. More than that, the Fed also downgraded its economic projections for 2016 across the board. Worse still, the Fed also lowered its rate hike projections from 1-2 rate hikes this year to just one or none at all. Rate hike projections for 2017 and 2018 were also slashed.
Greenback weakness persisted on most pairs (except NZD/USD and USD/JPY) until Thursday’s U.S. session when the Greenback broadly found support again.
There didn’t seem to be any catalyst for this, since the available catalysts were mixed and they were mostly low-tier. However, it’s possible that Friday’s recovery was just profit-taking by the Greenback bears. I guess we’ll know for sure next week.
The Swissy seems to be following in the yen’s footsteps in that the Swissy is also a safe-haven currency, but it managed to come in third place despite the risk-on vibes last week. Demand for the Swissy appears to have different drivers, though.
The first wave of buyers came after Switzerland’s State Secretariat for Economic Affairs (SECO) announced that, the Swiss economy is expected to grow by 1.5% for all of 2016 on stronger exports. This is better than the June forecast of +1.4%. Even better, the recent forecast is almost twice as fast as 2015’s +0.8% rate of expansion.
The next wave of Swissy bulls arrived after the FOMC statement. Why did the Swissy gain strength, you ask? Well, safe-haven flows most likely. Sure, there was risk-taking in the aftermath of the FOMC statement, but the Fed’s mixed signals also created some uncertainty.
And uncertainty leads to safe-haven demand. Uncertainty is also one of the reasons why the traditional safe-haven gold jumped on the FOMC decision despite the risk-on vibes.
The Loonie ended the week mixed. However, the Loonie actually had a good run for most of the week as it tracked the climb in oil prices. Why was oil on the rise, you ask?
Well, there were talks about an oil freeze deal between Saudi Arabia and Iran, as well as supply shocks, Greenback weakness due to the FOMC statement, and overall optimism over next week’s OPEC meeting.
Anyhow, the Loonie’s bullish run was cut short when Canada released a couple of disappointing top-tier economic reports on Friday, which caused the Loonie to decouple from oil.
To be more specific, retail sales in Canada fell by 0.1% month-on-month in July, missing expectations that it would increase by 0.5%. Meanwhile, Canada’s headline CPI for the month of August fell by 0.2%.
This is a pretty severe disappointment since CPI fell instead of printing a 0.1% increase. Furthermore, this marks the second consecutive month of negative CPI readings.
The Loonie decoupled from oil prices for a full two hours. Not to worry, though, since oil benchmarks slumped pretty hard and caught up with most Loonie pairs later.
As to what the slump was all about, well, that may have been due to profit-taking after four days of strength. However, some market analysts were pointing to skepticism over the possibility of an oil freeze deal being hammered out between Saudi Arabia and Iran.
- U.S. crude oil up (CLG6) by 3.70% to $46.02 per barrel for the week, but slumped hard by 3.42% on Friday
- Brent crude oil up (LCOH6) by 0.55% to $44.62 per barrel for the week, but slumped hard by 3.67% on Friday
There’s not really much to say about the euro. It had a mixed performance for the week and its price action was just as mixed. In short, it was vulnerable to opposing currency price action.
Okay, here’s this week’s scorecard: