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?
Looking at the table of the top 10 movers above, we can see that the top 7 are all yen pairs, with the yen losing out in every one of ‘em. It’s therefore pretty obvious that yen weakness was this week’s main theme.
Other than yen weakness, we’ve also got Aussie and pound strength as secondary themes. Okay, time to find out what was driving forex price action on these and the other currencies!
The Japanese Yen
The yen has been THE worst-performing currency for three weeks running now. And as strange as it sounds, the primary direct catalyst for the yen’s weakness appears to be the surprise reading for U.S. durable goods orders, as y’all can see on the chart above. Well, it’s not really all that strange. Let me explain.
If y’all can still remember last week’s Top Forex Market Movers of the Week, I noted back then that climbing yields have been the bane of yen bulls, since higher bond yields tend to stoke speculation that the BOJ will put its so-called “QQE With Yield Curve Control” framework into play through unlimited bond purchases. And we did finally see the BOJ implement its new framework through two bond-buying operations last week. Well, the BOJ tried (and failed) to implement its new framework at least.
Oh, for the newbies out there, the BOJ doesn’t purchase Japanese government bonds (JGBs) directly from the Japanese government. Instead, the BOJ buys ‘em with cold, hard cash from financial institutions, mainly banks. Cash purchases, in turn, generally mean printing more yen, which weakens the yen.
Getting back on topic, the bond-selling spree initially took a breather this week but resumed in earnest on Wednesday after the better-than-expected reading for U.S. durable goods orders was released. U.S. durable goods orders soared by 4.8% month-on-month in October, which is stunningly better than the expected 1.2% increase and is the fastest rate of increase in a year.
This naturally improved the outlook for the U.S. economy, which then fueled demand for riskier assets (namely U.S. equities) while crushing demand for safer assets (U.S. bonds in this case).
The resulting sell-off in U.S. bonds then triggered a selloff in global bonds, which crushed the poor yen. Not that I’m complaining or anything. Woo Hoo!
The Australian Dollar
I mentioned in last week’s Top Forex Market Movers of the Week that the Aussie dollar was the second weakest currency during that period. And the Aussie’s weakness at the time was linked to the commodities carnage back then, particularly the 8.8% weekly drop in iron ore prices.
This week, however, the Aussie ended up as the strongest currency of the week. And Aussie bulls can thank the recovery (and then some) in commodity prices for that.
Iron ore (62% content, delivered to Qingdao), in particular, was up by over 5% to $76.90 after dropping to $72.79. This is very goods news for Australian mining companies, spurring demand for the Aussie.
Base metals, such as copper, nickel, and iron, were actually leading the broad-based commodities rally. And the standard explanation for this is that speculators are betting heavily that Trump’s fiscal policies, which include investing heavily in infrastructure, would lead to higher demand for base metals.
Of course, market analysts also offered more detailed explanations, such as China’s crackdown on speculation only having a limited effect on commodity prices or even a Goldman Sachs note that upgraded the bank’s forecast on iron ore prices.
The Pound Sterling
After taking a break last week, the pound was back in action this week, ending up as the second strongest currency after the mighty Aussie.
But to recap, U.K. Prime Minister Theresa May gave a speech to the Confederation of British Industry (CBI) on Monday. In her speech, the PM tried her best to soothe U.K. businesses by promising them an extra investment in R&D. In addition, the PM hinted at the possibility of a deeper business tax cut than the expected drop from 20% to 17% by 2020 when she said the following:
“And we will also review the support we give innovative firms through the tax system.”
“Now we want to go further, and look at how we can make our support even more effective – because my aim is not simply for the UK to have the lowest corporate tax rate in the G20, but also a tax system that is profoundly pro-innovation.”
Aside from that, May also tried to ease Brexit-related jitters by repeating her promise to trigger Article 50 of the TEU “before the end of March next year,” adding that she will do her best to get a transitional deal while the negotiation process is underway so that business and individuals “can plan with certainty” rather than going off a “cliff edge“.
May’s words were apparently effective, since the pound advanced during and after her speech. Unfortunately for pound bulls, the pound later got kicked lower when Brexit-related jitters got renewed after the E.U.’s top Brexit negotiators began hinting that they’re gonna give the U.K. a very hard time, stoking fears of a “hard” Brexit. As for specifics, Guy Verhofstadt, the E.U.’s lead Brexit negotiator, had this to say:
“It is impossible to find Brexit solutions where we destroy the four freedoms. These four freedoms are key, they are a basic element of the European Union: the freedom of movement of goods, services, capital and of people. We will certainly never accept whatever development where these four freedoms at put at risk.”
To those who don’t know, a Brexit would mean that the U.K. would have control over its borders again. And the U.K. wants to restrict immigration in order to discourage economic migrants from continental Europe. This goes against one of the E.U.’s four freedoms, particularly the freedom of movement of people. This, therefore, implies that the U.K. and the E.U. would be doing a lot of head-butting since the U.K. for its part wants access to the single market in order to avoid a so-called hard Brexit.
Aside from Verhofstadt, E.U. Brexit negotiator Manfred Weber had this to say:
“So I must stress again: Brexit means Brexit, that means leaving the European Union, that means cutting off relations … and not cherry picking, not special relationships.”
Verhofstadt’s hints of subtle tension and Weber’s very open hostility to the U.K. were weighing down on the pound. Although it’s also possible that forex traders were preemptively betting that the U.K. Chancellor of the Exchequer Philip Hammond would deliver a disappointing August Forecast Statement. And it was mostly disappointing, as you can see below.
- 2016 GDP: revised higher to 2.1% vs. 2.0% originally
- 2017 GDP: revised lower to 1.4% vs. 2.2% originally
- 2018 GDP: revised lower to 1.7% vs. 2.1% originally
- 2019 GDP: 2.1%, no change
- 2020 GDP: 2.1%, no change
- 2021 GDP: 2.0% (new forecast)
Instead of dropping on the bad news, however, Sterling’s reaction was actually to climb higher. This can be explained by profit-taking by pound shorts.
After all, pound pairs have been dipping since the Brexit negotiators gave their piece. However, the pound likely got some actual demand later on, since Hammond had some surprisingly pleasant things to say after giving the bad news.
To begin with, Hammond announced plans to raise productivity in the U.K. by investing heavily in infrastructure and R&D, confirming (and adding to) the PM’s earlier speech:
“We choose in this Autumn Statement to prioritise additional high-value investment, specifically in infrastructure and innovation, that will directly contribute to raising Britain’s productivity.
“I can announce today a new National Productivity Investment Fund of 23 billion pounds to be spent on innovation and infrastructure over the next five years.”
Hammond also promised to double the U.K.’s export finance capacity “to make it easier for British businesses to export.” In addition, Hammond announced that “that London will receive 3.15 billion pounds as its share of national affordable housing funding to deliver over 90,000 homes.” Furthermore, Hammond promised to help tech companies that need financing by saying the following:
“I am taking a first step to tackle the longstanding problem of our fastest growing technology firms being snapped up by bigger companies, rather than growing to scale by injecting an additional 400 million pounds into venture capital funds through the British Business Bank, unlocking 1 billion pounds of new finance for growing firms.”
Overall, a mixed statement, but forex traders apparently have a glass-half-full view this week, since they opted to focus more on the optimistic parts, which sent the pound higher. It should be pointed out that the pound’s price action became more mixed after that, with some pound pairs trading sideways. Makes you wonder whether or not the pound’s strength will continue next week, huh?
The New Zealand Dollar
Just like last week, the Kiwi came in third place yet again. And looking at the chart above, the Kiwi initially showed very promising signs of strength, thanks to the commodities rally. Heck, the Kiwi was even winning out against the Aussie on Monday.
However, demand for the Kiwi began to falter on Tuesday, so much so that the Kiwi began losing to the Aussie while trading sideways against the rest of its forex rivals. There was no apparent reason for this mysterious price action.
And it gets even weirder because commodities were still in rally mode on that day. A series of earthquakes, including a magnitude 5.9 earthquake, did rock New Zealand on that day, but I’m not sure if that’s the reason since the devastating November 14 magnitude 7.8 earthquake didn’t seem to affect the Kiwi’s price action.
Traders later apparently lost all interest in the Kiwi come Wednesday, since the Kiwi’s price action began to diverge, which indicates that opposing currencies, rather than the Kiwi, were driving the price action of Kiwi pairs. Again, there was no clear fundamentals-based reason for this.
The Swiss Franc
The Swissy was the second weakest currency after the Japanese yen. But pinning down the reason for the Swissy’s broad-based weakness is rather difficult because the only economic catalyst for the Swissy was Switzerland’s trade data, but the Swissy didn’t seem to react to it. Moreover, the Swissy’s price action was very messy (as usual).
Given the Swissy’s win against the yen and losses to the Aussie and the pound, as well as the Swissy’s more modest losses to the other currencies, it’s probably safe to say that price action on Swissy pairs was being defined more by opposing currency price action.
Still, the Swissy was a net loser overall. And looking at risk sentiment this week, the bond-selling that I mentioned earlier is one proof of the prevalence of risk appetite. Another is how the major global equity indices performed, and they were mostly in the green, as you can see below.
- Nikkei 225 (N225) closed 2.30% higher to 18,381.22 for the week
- Shanghai Composite (SSEC) closed 2.16% higher to 3,261.94 for the week
- Hang Seng (HSI) closed 1.70% higher to 22,723.45 for the week
- The Euro Stoxx 50 (STOXX50E) closed 0.86% higher to 3,046.72 for the week
- The FTSE 100 (FTSE) closed 0.96% higher to 6,840.75 for the week
- The DAX (GDAXI) closed 0.33% higher to 10,699.27 for the week
- The DOW (DJI) closed 1.51% higher to 19.512.14 for the week
- S&P 500 (SPX) closed 1.44% higher to 2,113.35 for the week
It’s therefore safe to say that risk-taking was the dominant sentiment, and the risk-on vibes probably dampened safe-haven demand for the Swissy.
The Canadian Dollar
Oil benchmarks managed to scrape some gains this week, but the Loonie ended up a net loser overall.
- U.S. crude oil (CLG6) up by 0.66% to $45.99 per barrel for the week
- Brent crude oil (LCOH6) up by 0.49% to $47.09 per barrel for the week
Looking at the above chart, we can see that oil captured the bulk of its gains on Monday and Tuesday, thanks to optimism over OPEC’s planned oil production cut.
However, the Loonie was unable to fully capitalize on this, since Loonie pairs had a more mixed performance. There was no clear reason for the Loonie’s reluctance, but the Loonie was last week’s best performer, so perhaps profit-taking blunted the Loonie’s advance.
Anyhow, when oil began to show signs of weakness on Friday, the Loonie got dragged lower, too. And this, plus the Loonie missing out on the early oil rally is the reason why the Loonie was a net loser, even though oil was slightly in the green this week.
As to what caused oil to slide on Friday, market analysts point to reports that Russia would only be agreeing to an oil freeze deal, not a production cut deal, which caused Saudi Arabia to storm off and abandon talks with non-OPEC members like Russia.
Naturally, that killed optimism for OPEC’s planned production cut, since the planned production cut also included plans for non-OPEC members to reduce oil output by 500 million barrels per day.
The U.S. Dollar
After showing strength for two straight weeks, the Greenback finally showed signs of fatigue this week, since it had a more mixed performance.
The Greenback was dormant until Wednesday’s early U.S. session finally around, which is when the better-than-expected reading for U.S. durable goods orders got revealed. This surprise reading gave the Greenback a broad-based bullish boost, especially against the yen.
Later on, the minutes for the November FOMC got released as well, but the Greenback barely budged, likely because Yellen already gave her hawkish speech last week. The FOMC meeting minutes do have some important things that you may wanna keep in mind when the December FOMC meeting finally rolls around.
Anyhow, the Greenback then slowly edged lower against its peers during Thanksgiving Thursday. No clear reason for the slow slide, however, other than profit-taking after two weeks of strength and a quick jump during the week.
Make sure to keep an eye on the Greenback next week, though, since we’ve got another NFP Friday coming up. And this NFP Friday happens to be the last NFP Friday before the December FOMC meeting.
Like the Greenback, the euro had a mixed performance this week. And also like the Greenback, the euro’s price action had some uniform movements.
As I have been mentioning in the past couple of weeks, the current narrative is that Brexit and Trump’s victory are signs that populist, anti-establishment movements are on the rise.
This is bad for the euro since the Euro Zone has to deal with a potential Italeave and Frexit.
But at the same time, it’s good for the pound, since the focus is shifting to uncertainty in continental Europe. As a result, the price action of the pound and euro pairs has become somewhat inverse.
Anyhow, the euro started the week on a weak footing when Theresa May’s speech sent the pound higher while causing most euro pairs to tumble.
The euro then traded mostly sideways after that before getting hammered across the board when Hammond presented the Autumn Forecast Statement to the U.K. parliament. After that, the euro began trading roughly sideways again until the week came to a close.