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?
The Loonie reigned supreme this week, with the Greenback following closely behind.
The yen, meanwhile, got bushwhacked yet again. So, what was driving forex price action on these and the other currencies?
The Loonie’s strength last week was apparently an early sign of the Loonie’s ascendancy this week. After all, the Loonie did manage to depose the pound, emerging as this week’s king of pips (or queen, if you like). And Loonie bulls can thank the surge in oil prices this week, given that Loonie pairs seem to be tracking oil prices.
- U.S. crude oil (CLG6) up by 5.02% to $43.13 per barrel for the week
- Brent crude oil (LCOH6) up by 4/06% to $44.56 per barrel for the week
The Loonie actually had a mixed start. Although signs of uniform movement already began to show by the time Monday’s U.S. session rolled around. However, the fun didn’t begin until Tuesday, which is when the Loonie started steamrolling ALL of its forex rivals. In fact, the bulk of the Loonie’s gains (as well as that of oil), was captured on Tuesday. So, what happened on Tuesday, you ask?
Well, a report, which cited an unnamed source (i.e. a rumor), began floating around that Qatar, Algeria, and Venezuela were working very hard to ensure that OPEC’s planned production cut would push through. In addition, the report said that Russia was going to have an informal meeting with some OPEC members in Doha during the week.
The aforementioned report revived hopes for an OPEC oil deal, which convinced many oil shorts to cover their positions while enticing oil bulls to go on a buying frenzy, according to market analysts. And since Canada is an oil-exporting country, the Loonie apparently dragged along, since there weren’t any other catalysts at the time.
Both oil and the Loonie later gave back some of their gains during Thursday’s U.S. session. And this was blamed by market analysts on Greenback’s strength at the time.
Fortunately for the Loonie and oil, demand started returning during Friday’s morning London session, thanks to yet another report from yet another unnamed source that OPEC supposedly offered Iran a deal that it can limit its oil output at 3.92 million barrels per day.
This is very close to the 4.0-4.2 million barrels per day that Iran is demanding. And while Iran hasn’t replied to the proposal yet, the report was apparently enough to fuel speculation that OPEC is getting close to sealing the deal.
Just like last week, the Greenback showed strength but came up short, so it only ended up in second place yet again. Too bad!
The Greenback had a mixed performance from Monday until Wednesday’s Asian session. Last week’s theme of a Trump-fueled Greenback rally probably continued to play out, though, since the Greenback showed strength against most of its forex rivals. The Greenback then broadly moved higher against its peers during Wednesday’s morning London session, thanks to a hawkish speech by St. Louis Fed President James Bullard.
To be more specific, Bullard said that:
“There were a lot of predictions that if the election went the way of Republicans and President-elect Donald Trump, then there would be great deal of volatility, but that has not materialized so far.”
As such, a “single policy-rate increase, possibly in December, may be sufficient to move monetary policy to a neutral setting.” Bullard also later said that “You would have to have a surprise, I think, at this point” in order to stop a December rate increase.
Pretty hawkish, yeah? Bullard’s statement didn’t have a lot of sticking power, though, probably because he talks the talk but has yet to walk the walk by actually voting for a rate hike.
Moving on, the Greenback traded roughly sideways after that, probably because traders were waiting for Fed Head Janet Yellen herself. Yellen’s prepared speech was actually released about two hours ahead of her scheduled testimony before the Joint Economic Committee. And it was rather hawkish, especially the following parts (emphasis mine):
“At our meeting earlier this month, the Committee judged that the case for an increase in the target range had continued to strengthen and that such an increase could well become appropriate relatively soon if incoming data provide some further evidence of continued progress toward the Committee’s objectives.”
“But because monetary policy is only moderately accommodative, the risk of falling behind the curve in the near future appears limited, and gradual increases in the federal funds rate will likely be sufficient to get to a neutral policy stance over the next few years.”
The hawkish rhetoric in Yellen’s speech caused the Greenback to start advancing against its rivals. Incidentally, this is also when oil and the Loonie started giving back their gains, as I mentioned earlier. Getting back on topic, the Greenback’s upward momentum only accelerated when Yellen’s testimony went underway.
Last week’s global bond selloff, which was fueled by expectations that Trump’s fiscal policies would lead to faster U.S. growth and inflation, persisted this week. As a result, the yen’s weakness also persisted as speculation grew that climbing bond yields would finally force the BOJ to put its so-called “QQE With Yield Curve Control” framework into play.
This framework basically allows the BOJ to expand the monetary-based beyond the original target of ¥80 trillion per year if it needs to. Moreover, the new framework allows the BOJ to purchase unlimited Japanese Government Bonds (JGBs) in order to keep the yield of JGBs at around 0%.
Anyhow, rising bond yields finally forced the BOJ to make its move on Thursday, when the BOJ announced that it was going to finally implement its new framework for the first time ever by carrying out two bond-buying operations. Interestingly enough, it was later reported that nobody wanted to sell to the BOJ. Still, the damage to the yen was already done.
The Aussie dollar got its butt kicked rather hard this week, so much so that it ended up as the second weakest currency after the Japanese yen.
The Aussie’s broad-based weakness started on Wednesday, as I noted in my recap of the morning London session. And as I mentioned back then, commodities were undergoing a bloodbath, which likely weighed down on the comdoll.
The one commodity that very likely brought the Aussie down to its knees, however, was iron ore. You see, iron ore prices had a massive slump this week, with iron ore (62% content, delivered to Qingdao) plunging by a whopping 8.8% to $72.79 per dry metric ton. This is the hardest weekly drop since May of this year.
And market analysts were blaming the drop on the Chinese government’s crackdown on what China deems to be excessive speculation.
Oh, for those who don’t know, iron ore accounts for around 25% of Australia’s total exports. Iron ore is basically to Australia what oil is to an oil-exporting country like Canada. A drop in iron ore price would therefore have negative repercussions to Australian mining companies, and by extension, the overall Australian economy and the Aussie dollar.
The Kiwi came in third after the Loonie and the Greenback. However, the price action on the Kiwi was rather messy, as y’all can see on the chart above. This implies that price action was being driven more by the opposing currencies, rather than by demand (or lack thereof) for the Kiwi itself. Kinda makes sense, I guess. After all, the Kiwi only had the latest dairy auction on the forex calendar this week.
Speaking of the latest dairy auction, the GDT price index rose by 4.5% (+11.4% previous), marking the third consecutive rise in dairy prices. New Zealand’s economy is quite literally powered by dairy exports, so the rise in dairy prices probably shielded the Kiwi from the commodities carnage that brought down the Aussie.
GBP & EUR
I’m lumping these two currencies together because their price action is somewhat related, as you’ll see in a while. But to give those who missed last week’s Top Forex Market Movers of the Week, the current narrative is that Trump’s victory and Brexit have ignited fears that populist, anti-establishment movements in Italy, France, Germany, and other parts of Europe will be successful.
This has caused uncertainty in continental Europe to rise, which is net bearish for the euro, but net bullish for the pound, since market players are now focusing on and trying to price in the uncertainty in the Euro Zone, rather than on Brexit-related uncertainty.
With that out of the way, both the pound and the euro had a chaotic start, although the pound later began to show signs of weakness, probably because of profit-taking after a very strong performance during the previous week and ahead of BOE Guv’nah Mark Carney’s testimony.
Later on Tuesday, the pound got slapped even lower while the euro got a bullish boost when a memo was leaked by The Times.
The memo alleged that Theresa May’s government is divided on Brexit, and that “no common strategy has emerged” on how to approach the negotiating table. Moreover, “it may be 6 months before there is a view on priorities/negotiation strategy as the political situation in the UK and the EU evolves.”
The memo also alleged that:
“Industry has 2 unpleasant realisations — first, that the Government’s priority remains its political survival, not the economy — second, that there will be no clear economic-Brexit strategy any time soon because it is being developed on a case-by-case basis as specific decisions are forced on Government.”
The memo reignited Brexit-related fears, market analysts say, which is why the pound slid even lower while the euro happily took advantage of the pound’s weakness. Do note, however, that Theresa May’s government later denounced the leaked memo, saying that it “has no authority.” Various pro-Brexit politicians also contributed their thoughts, calling the memo “utterly bogus” and “complete nonsense.” Very tactful and eloquent, I say.
Moving on, the pound’s price action later began to diverge when BOE Guv’nah Mark Carney and other top BOE officials began to testify before the Treasury Committee since the pound began to quickly recover lost ground against most of its forex rivals, but still had a difficult time against the Greenback and the Loonie. Price action on the euro, meanwhile, became notably more bearish, probably because the focus shifted back to uncertainty in continental Europe.
The gist of it all, though, is that the aftermath of the Brexit referendum was not as apocalyptic as many market analysts predicted. Moreover, the BOE now has a neutral monetary policy bias, “so rates could go up, they could go down.” And since the BOE now has a neutral monetary policy bias, it is also no longer actively considering extending its QE program.
In contrast, the ECB meeting minutes revealed that most ECB officials seem to favor extending the ECB’s QE program beyond March 2017 (emphasis mine):
“All in all, members widely shared the view that it was imperative to remain fully committed to preserving the very substantial degree of monetary accommodation that was necessary to secure a sustained convergence of inflation towards levels below, but close to, 2% over the medium term.”
This was reinforced during ECB President Mario Draghi’s speech on Friday when he said the following (emphasis mine):
“So even if there are many encouraging trends in the euro area economy, the recovery remains highly reliant on a constellation of financing conditions that, in turn, depend on continued monetary support. The ECB will continue to act, as warranted, by using all the instruments available within our mandate to secure a sustained convergence of inflation towards a level below, but close to 2%.”
“We also have to recognise that we operate under a still significant degree of uncertainty. Whether the economic recovery becomes more solid, and how quickly inflation dynamics become more self-sustained, depends not just on the current monetary policy stance, but also on other policies, as I have discussed on several other occasions. Restoring a sense of direction – and therefore confidence – would be the simplest and yet most powerful way to deliver economic stimulus.”
Aside from the current narrative that a Trump victory is bad for continental Europe, it therefore also looks like we’re seeing monetary policy divergence that’s in favor of the pound.
There’s really nothing much to say about the Swissy other than that its price action was a complete mess, which indicates vulnerability to opposing currency price action. Both SNB Chairman Thomas Jordan and SNB Vice Chairman Fritz Zurbruegg had speeches on Wednesday, but their threats of intervention seemed to fall on deaf ears.