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?
Based on the chart above, there were three main themes during the trading week:
- another week of pound strength
- demand for the Loonie, and
- yet another week of yen bashing
So, what was driving forex price action on these and the other currencies?
The Japanese Yen
As of this week, the Japanese yen has been THE weakest currency of the lot for four consecutive weeks now. Whoa! That’s an entire month of yen bashing! Again, I’m not complaining or anything. (Yippee-Ki-Yay!)
The yen actually had a strong start, thanks to the prevalence of risk aversion at the time, which created demand for bonds, causing bond yields to dip. Although it’s also possible that some yen shorts took delicious profits off the table after three consecutive weeks of yen weakness. November was coming to an end after all.
The bullish yen party ended on Tuesday, though, thanks to returning risk appetite, especially in Europe. However, the yen bashing only started to really get underway come Wednesday, thanks to yet another round of intense bond-selling, which sent bond yields higher while weakening the yen.
And as I noted in last week’s Top Forex Market Movers of the Week (and the others before it), 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.
Also, and especially during risk-on times, a wider spread between Japanese bonds and other bonds, particularly that of the U.S., tends to convince Japanese investors to lighten up on Japanese bonds in favor of riskier assets or higher-yielding U.S. bonds. And when going for foreign assets, say U.S. equities and/or bonds, Japanese investors would have to sell their currency and buy some Greenbacks, which obviously weakens the yen.
The Pound Sterling
In last week’s Top Forex Market Movers of the Week, I noted that the pound’s price action back then made one wonder whether or not the pound’s strength will continue. And, well, we got our answer: Yes! In fact, the pound even ended up as the one currency to rule them all this week.
Anyhow, the pound started the week by slipping lower. As I noted in Monday’s London session recap, there was no apparent reason for the pound’s weakness other than profit-taking after a strong performance during the previous week. There were reports about a think tank called “British Influence” whose lawyers argued that triggering Article 50 of the TEU would not be enough to get the U.K. out of the single market, and that Article 127 of the EEA must also be triggered. But as I noted then, the pound barely reacted when that news first began to spread.
Moving on, demand for the pound got revived on Tuesday, thanks to the BOE’s Money and Credit Report for the October period. In that report, it was revealed that the number of mortgage approvals came in at 67.5K, which is better than the consensus reading of 65.0K and is the best reading since the 70.0K printed in March of this year. The reading implies that the U.K. housing market is still relatively healthy, despite the Brexit referendum.
Another major indicator worth pointing out is net lending to individuals, which increased by £4.9B in October. This is more than the expected £4.8B increase and is also better than the previous month’s £4.7B increase. The better-than-expected reading shows that consumer credit is still strong, which may translate to strong consumer spending.
For the newbies out there, hedge funds, mutual funds, pension funds, and other large players usually rebalance their portfolios and/or prepare to make cash distributions at the end of the month, which results in some rather funky price action.
As for the stress test results of the seven major banks, the Royal Bank of Scotland Group failed the test and was required to submit a revised capital plan. Standard Chartered and Barclays also failed to pass the test, but are not required to submit a revised capital plan. As for HSBC, the Lloyds Banking Group, the Nationwide Building Society, and Santander UK, they all passed the test.
Moving on to the BOE’s financial stability report, the BOE was rather happy that the U.K. did rather well, but gave the following warning (emphasis mine):
“The outlook for UK financial stability remains challenging. The UK economy has entered a period of adjustment following the EU referendum. The likelihood that some UK-specific risks to financial stability could materialise remains elevated.”
The pound likely dipped on Wednesday because of those factors mentioned above. However, the pound mysteriously started gaining strength across the board after the initial tumble. There were no apparent catalysts for this. Although focus on the more optimistic points of the Financial Stability Report or repositioning by the large players are possible reasons. Some market analysts also suggested pound strength at the expense of the euro’s weakness due to risk-taking ahead of and after the OPEC deal. I don’t buy it, though, since the euro actually had a mixed performance at the time.
In any case, the pound spurted higher after Brexit Secretary David Davis was asked if the U.K. government is open to paying for access to the E.U.’s single market, and Davis answered as follows:
“The major criterion here is that we get the best possible access for goods and services to the European market and if that is included in what he’s talking about then of course we would consider it.”
The question and Davis’ reply were within the context of Dutch Finance Minister Jeroen Dijsselbloem’s statement that the U.K. may be able to stay in the single market at a cost. And Davis’ reply apparently eased fears of a possible “hard” Brexit, which fueled demand for the pound while scaring away pound shorts.
After that, the pound slumped for no apparent reason. Although profit-taking ahead of the NFP report is a probable reason. However, market analysts say that waning “hard” Brexit jitters continued to fuel demand for the pound, and so the pound steadily rose higher until the trading week ended.
The Canadian Dollar
Oil benchmarks skyrocketed this week. And since most Loonie pairs were apparently tracking oil’s price action, most Loonie pairs also ended up in positive territory for the week.
- U.S. crude oil (CLG6) up by 12.22% to $51.69 per barrel for the week
- Brent crude oil (LCOH6) up by 15.22% to $54.43 per barrel for the week
And the main driver for oil’s (and the Loonie’s) price action this week was OPEC’s planned production cut. Interestingly enough, oil and Loonie pairs started moving strongly several hours before OPEC announced the oil cut deal.
And as I noted in Wednesday’s London session recap, oil benchmarks were already up by over 7% then while the Loonie was already the best-performing currency of the day. It’s therefore probably more accurate to say that rampant speculation on the OPEC deal was the main driver for oil’s price action. Oil and the Loonie did continue to gain strength after OPEC announced that it successfully concluded a deal, though.
Anyhow, I won’t be going into the details of the OPEC deal here because Forex Gump already has a write-up for it. You can read Forex Gump’s write-up here. Or if you want, you can also check out OPEC’s official agreement here.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The U.S. Dollar
I mentioned last week that the Greenback’s mixed performance was a sign that the Greenback rally may finally be feeling some fatigue. Well, this week, it looks like the Greenback rally finally got exhausted since the Greenback ended up as the second worst-performing currency of the week.
To be fair, the Greenback actually traded roughly sideways against most of its peers for most of the week. The Greenback then steadily grinded lower starting on Thursday’s U.S. session. Other than profit-taking by Greenback bulls ahead of the NFP report, there was no apparent reason for this wonky price action, especially since economic indicators released at the time were mostly positive.
And when the NFP report was finally released, there was no explosive price action on the Greenback because the NFP report actually sent a mixed signal. Forex Gump has more on that in his Review of the November NFP Report, which you can read here.
The gist of it is that non-farm employment was above the 100K needed to keep up with working-age population growth while the jobless rate fell to multi-year lows, which improved expectations for a December rate hike.
But at the same time, another hit to the labor force participation rate and an unexpected fall in wages eroded expectations for future rate hikes. And based on how most Greenback pairs behaved, it looks like forex traders were more focused on how future rate hikes may play out, rather than on the December rate hike.
The New Zealand Dollar
The Kiwi has been the third best-performing currency for the third week running. However, the Kiwi’s strength this week is rather weird because most of the major equity indices were mixed bit mostly in the dumps for the week, which implies that risk aversion was the dominant market sentiment.
- Nikkei 225 (N225) closed 0.24% higher to 18,426.08 for the week
- Shanghai Composite (SSEC) closed 0.55% lower to 3,243.84 for the week
- Hang Seng (HSI) closed 0.70% lower to 22,564.82 for the week
- The Euro Stoxx 50 (STOXX50E) closed 0.97% lower to 3,018.89 for the week
- The FTSE 100 (FTSE) closed 1.61% lower to 6,730.72 for the week
- The DAX (GDAXI) closed 1.74% lower to 10,513.35 for the week
- The DOW (DJI) closed 0.10% higher to 19.170.42 for the week
- S&P 500 (SPX) closed -0..97% lower to 2,191.95 for the week
- Nasdaq Composite (IXIC) closed 2.65% lower to 5,255.65 for the week
Risk aversion actually began to manifest itself during Wednesday’s U.S. session, starting with a major selloff in U.S. tech companies, especially the so-called FANG stocks (Facebook, Amazon, Netflix, Google). Before that, there were signs of risk-taking. And this period of risk appetite apparently allowed the higher-yielding Kiwi to stage a broad-based rally.
Some market analysts argue that the Kiwi may have strengthened on the back of the RBNZ’s Financial Stability Report. I don’t agree with that because the Kiwi already advanced a great deal before the report was released, as you can see on the chart above. The RBNZ’s Financial Stability Report did explicitly say that the RBNZ is very worried about the housing market (emphasis mine):
“Vulnerabilities in the housing market have increased in the past six months. Despite some recent softening, house price growth in Auckland remains high at 9.3 percent in the year to October, and Auckland’s house price-to-income ratio, at 9.6, is among the highest in the world. House price pressures continue to spread to the rest of the country, with most cities experiencing annual house price growth above 10 percent. Credit to the household sector is growing rapidly, and the household debt-to-disposable income ratio now stands at 165 percent, a record high.”
This implies very heavily that the RBNZ is unwilling to cut rates further, since cutting rates further would mean easier credit to the housing sector, which would then further pump up the threat of a housing bubble. This also reinforces what RBNZ Guv’nah Wheeler said in the November RBNZ statement and presser that “there’s [only] a 20% probability of a further cut.”
Later, when risk aversion returned in force during Wednesday’s U.S. session, the Kiwi got gutted. The RBNZ’s hint that it won’t be cutting rates again anytime soon likely helped to limit the Kiwi’s losses, however, even as risk aversion persisted throughout the rest of the week.
An interesting thing then happened on Friday. As you can see on the chart above, the Kiwi actually gained strength when the disappointing U.S. NFP report was released. This seems kinda weird at first, but it makes more sense when you consider the following points:
- The trade turnover on the Kiwi is roughly around U.S. $105 billion per day
- Most of the trades occur offshore with NZD/USD in focus, according to RBNZ Guv’nah Wheeler himself during the August RBNZ Presser
- The RBNZ expects the Kiwi to weaken, “reflecting an improvement in global economic conditions and a narrowing of interest rate differentials between New Zealand and other advanced economies.”
- This “narrowing of interest rate differentials“ mostly means a Fed rate hike, with the rationale being that a Fed rate hike (or hikes) would pull investors away from New Zealand while enticing more investors to go to the U.S., causing NZD/USD to tank, which would then pull down the other Kiwi pairs.
Given the above points, we can therefore conclude that U.S. dollar dynamics were likely in play – most Kiwi trades are focused on NZD/USD, and since NZD/USD rose, other Kiwi pairs got pulled higher with it. Also, the relatively poor NFP report dampened future rate hike expectations. Fewer future rate hikes from the Fed, together with the RBNZ’s implied reluctance to cut further, mean fewer incentives to dump the Kiwi in favor of the Greenback.
Well, that was a longer piece than usual, but I hope the newbies out there found it helpful. I’m assuming you didn’t space out on me of course.
The Australian Dollar
This week, iron ore got a major beat-down, so the Aussie also got some good, old-fashioned beat-down, ending up as the third worst performing currency of the week.
The Aussie suffered a large chunk of its losses on Wednesday. And while the very disappointing reading for building approvals (-12.6% vs. +2.2% expected, -9.3% previous) was already eroding the Aussie’s strength, it wasn’t until later when iron ore plunged by a whopping 7% that the Aussie also slumped very hard.
The Swiss Franc
Looking at table showing the Swissy’s mixed performance, as well as the chart showing how messy price action on the Swissy was (as usual), it’s probably safe to say that opposing price action defined price action on Swissy pairs this week.
The euro’s performance and price action was also rather mixed. Keep an eye on the euro, though, since this Sunday’s Italian referendum may define the euro’s price action next week. Speaking of the Italian referendum, maybe that risk event is the reason why forex traders were wary of positioning heavily on the euro this week, resulting in the euro’s mixed and choppy price action.
Okay, here’s this week’s scorecard:
And here’s last week’s poll results:
The 20.41% of you who voted for the pound got it right! Good job! The 6.12% who voted for the Loonie and the 4.08% who voted for the Kiwi would have also done well. Unfortunately, 34.69% voted for the Greenback while 18.37% voted for the yen. Hopefully, you were able to switch your bias during the course of the week. Although switching bias on the Greenback would have admittedly been tricky, given how price action played out.
Anyhow, now that you know what the likely drivers were this week, and having taken a look at the forex calendar for next week, which currency do you think will come out on top next week? Vote in the poll below!
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