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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?

Top Forex Weekly Movers (Dec. 5 - 9, 2016)

Looking at the table above, we’ve got four pound pairs, four yen pairs, and four Loonie pairs, with the yen and the pound showing weakness while the Loonie showed strength. So, it looks like the following themes were in play this week:

  1. a reversal of fortune for the pound
  2. another strong week for the Loonie
  3. yet another week of yen bashing

With that out of the way, it’s now time to see what was driving forex price action on these and the other currencies!

The Canadian Dollar

USD/CAD: 1-Hour Forex Chart
USD/CAD: 1-Hour Forex Chart

CAD

The Loonie was the second strongest currency last week, but it dethroned the mighty pound to end up as this week’s best performing currency.

However, oil benchmarks actually ended the week in the red, as you can see below.

  • U.S. crude oil (CLG6) down by 0.37% to $51.49 per barrel for the week
  • Brent crude oil (LCOH6) down by 0.18% to $54.36 per barrel for the week

What’s up with this weirdness, yo? Well, looking at the chart above, we can see that the Loonie had a very mixed start and then proceeded to trade roughly sideways from Monday until Thursday’s London session. All the while, oil was dipping lower, thanks to reports that OPEC’s oil output jumped to a record high in November while Russia’s output was at a 30-year high. Quite naturally, the report caused faith in the OPEC deal to waver.

Interestingly enough, the slide in oil prices didn’t drag the Loonie lower. There was no clear reason for this, but it is highly likely that traders were wary of positioning heavily ahead of the BOC’s monetary policy decision, which also helps to explain why the Loonie was trading roughly sideways. And when the BOC announced that it was keeping the overnight rate steady at 0.50%, the Loonie got a little boost before trading roughly sideways again.

Speaking of the BOC decision, the BOC decided to keep the policy rate unchanged because “the dynamics of growth are largely as the Bank anticipated” while CPI “picked up in recent month,” albeit “slightly below expectations, largely because of lower food prices.” The BOC also happily noted that growth in Q3 “rebounded strongly” after a “very weak first half of 2016.” However, the BOC warned that “more moderate growth is anticipated in the fourth quarter.” But on a more upbeat note, “the effects of federal infrastructure spending are not yet evident in the GDP data.”

Getting back on topic, the Loonie started gaining broad-based strength during Thursday’s U.S. session. What happened then? Well, the Loonie got a double boost from recovering oil prices and the release of Canada’s building permits report.

Regarding the building permits report, it was revealed that the value of building permits issued in October soared by 8.7%, which is significantly better than the expected 1.6% increase. More importantly, the jump was mainly due to higher residential and commercial building intentions from Alberta. This is very significant because oil-rich Alberta felt the brunt of the 2014-2015 oil crash. The higher building intentions therefore indicates that Alberta is recovering, which also implies that Canada’s transition away from the energy sector is progressing well.

As for the recovery in oil prices, that was apparently fueled by speculation that non-OPEC members would agree to OPEC’s planned production cut in today’s meeting with non-OPEC member (Saturday, December 10).

You see, part of OPEC’s planned production cut is for non-OPEC members to also slash output by 600,000 barrels per day. Russia has already said that it is ready to cut oil output by 300,000 barrels per day while other non-OPEC members have yet to make a commitment. Russia’s intention to commit to oil cut deal is just air until the deal is fleshed out and finalized in today’s meeting in Vienna, however.

Anyhow, just make sure to keep an eye on how today’s Vienna meeting unfolds, since that will likely affect oil’s (and the Loonie’s ) price action next week.

The Japanese Yen

USD/JPY: 1-Hour Forex Chart
USD/JPY: 1-Hour Forex Chart

JPY

Wowzers! The Japanese yen has been THE weakest currency for five consecutive weeks running now. Will there ever be an end? I’m still not complaining or anything, though (Yahoo!)

The yen initially showed strength, thanks to the risk aversion brought about by the Italian referendum. However, when risk sentiment recovered, a bond selloff was triggered (with some help from FOMC Dudley’s rhetoric). As a result, the yen’s nemesis – rising bond yields – returned to give the yen a good, old-fashioned beat-down.

After that, the yen traded sideways and even recovered a bit on Wednesday when global bond yields dipped a bit, thanks to poor German data and skittishness ahead of the ECB decision, according to market analysts.

Unfortunately for the poor yen, bond yields began rising again on Thursday, thanks to returning risk appetite after the ECB decided to extend its QE program at a slower rate while leaving the door open to the possibility of further easing. As a consequence, the poor yen got another thrashing yet again.

The Pound Sterling

GBP/USD: 1-Hour Forex Chart
GBP/USD: 1-Hour Forex Chart

GBP

Oh, how the mighty have fallen! The pound was last week’s top dog, but it ended up as this week’s second weakest currency after the yen. What caused this reversal of fortune?

Looking at the overlaid chart above, we can see that the pound broadly suffered the bulk of its losses during Tuesday’s U.S. session until Wednesday’s U.S. session. Tuesday’s broad-based slump was triggered by renewed Brexit jitters after Theresa May asked Parliament to stick to the timetable of triggering Article 50 of the TEU by March 2017 to start the actual Brexit process, as well as forcing MPs to reveal whether or not they would “respect the wishes” of the British people by voting on the timetable. All the while the High Court was

These jitters persisted until Wednesday, but the pound’s woes only increased when it got slammed by another wave of sellers after it was revealed that total industrial production in the U.K. dropped sharply in October.

To quote (i.e. blatantly copy-paste) my commentary from Wednesday’s London session recap:

“The 1.3% month-on-month drop was a severe disappointment because the reading was expected to print a 0.2% recovery after September’s 0.4% fall. Also, this is the third negative reading in a row, as well as the sharpest drop since September 2012.”

“The main drag came from 8.6% slump in mining and quarrying output, although the 0.9% slide (+0.6% previous) in manufacturing output also exerted downward pressure. In addition, weakness in the manufacturing sector was broad-based, with only 9 of the 13 sub-sectors reporting declines.”

“Year-on-year, industrial production fell by 1.1%, going in the opposite direction from the consensus that it would improve from 0.4% to 0.5%. Moreover, this is the first negative reading in 10 months. And looking at the details of the report, the mining and quarrying sector is still the main culprit, thanks to the the 8.7% drop, which subtracted 1.15% from total output. The 0.4% tumble in manufacturing output was also a drag, deducting 0.30% from total industrial growth.”

Thankfully for pound bulls, it later came out that MPs voted overwhelmingly in favor of triggering Article 50 of the TEU by March 2017. The vote does not really start the Brexit process and is actually non-binding. However, it does show how MPs will likely vote when the time finally comes to start the actual Brexit process, which likely eased Brexit-related uncertainty a bit, allowing the pound to recover some of its losses. After that, price action on pound pairs diverged, indicating that opposing currency price action was now driving price action.

Oh, make sure to keep an eye on the pound, since we’ve got the MPC meeting and policy decision on next week’s calendar.

The Other Currencies

Okay, here’s how the other currencies fared this week:

The Euro

EUR/USD: 1-Hour Forex Chart
EUR/USD: 1-Hour Forex Chart

EUR

Euro pairs started the week by gapping lower across the board, thanks to the “No!” camp’s victory during the Italian referendum in constitutional reforms. However, the euro soon regained its composure (and then some) when the morning London session rolled around.

Market analysts attributed this sudden switch in sentiment to a possible short squeeze as well as speculation that political turmoil would only be limited and that early elections have a low probability of happening. And it also helped that Alexander Van der Bellen, former leader of the Green Party, was able to win out against the Eurosceptic Freedom’s Party’s Norbert Hofer, since that throws a wrench into the running narrative that Brexit and Trump’s victory is a sign of rising populism and anti-establishment movements.

After that, the euro traded mostly sideways, as forex traders hunkered down ahead of the ECB policy decision and presser. Reports and events related to the Italian referendum did pop out here and there ahead of the ECB decision, but as Forex Gump pointed out in his roundup (read it here), they were mostly within expectations and not really market-moving. Well, not yet anyway. The request for an extension for its privately-backed recapitalization plan by Monte dei Paschi, one of the most trouble Italian banks, could potentially become a significant event. And the same can be said for the Italian Constitutional Court’s scheduled Jan. 24 hearing on the legitimacy of a new electoral law, especially if it opens the way for early elections.

Going back to the ECB decision, Forex Gump also has a write-up for that (read it here). The gist of it all is that the ECB kept rates unchanged while extending its QE program from March 2017 to December 2017. The extension is three months longer than expected, but it is at a reduced rate of €60 billion per month, down from €80 billion. The ECB, via ECB Overlord Draghi’s presser, also stressed that the reduced rate of asset purchases is not tapering and Draghi even proceeded to trash the notion, saying that:

“[T]he natural way to look at a word like that is to have a policy whereby purchasers would gradually go to zero, and that’s not been discussed or, as a matter of fact, it’s not even been on the table.”

Also, the ECB made it is quite clear that it’s still open to further easing (emphasis mine):

If, in the meantime, the outlook becomes less favourable or if financial conditions become inconsistent with further progress towards a sustained adjustment of the path of inflation, the Governing Council intends to increase the programme in terms of size and/or duration.”

As a result of the extension and Draghi’s dismissal of the idea of “tapering” the ECB’s QE program, as well as Draghi’s blatantly dovish rhetoric and the ECB’s openness to further easing, the euro got squashed, returning its early gains and ending up as one of the weaker currencies this week.

The U.S. Dollar

USD/JPY: 1-Hour Forex Chart
USD/JPY: 1-Hour Forex Chart

USD

 

The Greenback was the second strongest currency this week. But looking at the table above, we can see that the Greenback barely edged out a win against some of its forex rivals.

Anyhow, the Greenback was had mixed and choppy price action for most of the week, but got a bullish boost across the board on Thursday. Specifically, the Greenback strengthened across the board after the ECB announced its policy decision. What’s up with wonky price action? Well, as I mentioned earlier when we were discussing the yen, bond yields widened after the ECB statement, including U.S. bond yields. Also, the ECB decision caused U.S. equities to rally. And these likely boosted demand for the Greenback, market analysts say.

By the way, the last FOMC statement is coming up next week, so make sure to keep an eye on the Greenback.

The New Zealand Dollar

NZD/USD: 1-Hour Forex Chart
NZD/USD: 1-Hour Forex Chart

NZD

The Kiwi had a mixed performance this week, but was a net winner overall. And it looks like the higher-yielding Kiwi’s price action was underpinned by the prevalence of risk appetite this week.

  • Nikkei 225 (N225) closed 3.10% higher to 18,996.37 for the week
  • Hang Seng (HSI) closed 0.87% higher to 22,760.98 for the week
  • The Euro Stoxx 50 (STOXX50E) closed 6.10% higher to 3,198.98 for the week
  • The FTSE 100 (FTSE) closed 3.32% higher to 6,954.21 for the week
  • The DAX (GDAXI) closed 6.57% higher to 11,203.63 for the week
  • The DOW (DJI) closed 3.06% higher to 19,756.85 for the week
  • S&P 500 (SPX) closed 3.08% higher to 2,259.53 for the week
  • Nasdaq Composite (IXIC) closed 3.59% higher to 5,444.50 for the week

However, the Kiwi got a bullish infusion when RBNZ Guv’nah Graeme Wheeler gave a speech on Wednesday. In his speech, Wheeler reiterated his concern over the housing market, saying that:

“Numerous measures indicate that New Zealand house prices are significantly inflated relative to usual valuation indicators.”

This is the same sentiment from last week’s RBNZ Financial Stability Report and heavily implies that the RBNZ is worried about cutting rates further, since further cuts would mean easier credit, which may worsen the threat of a housing bubble.

Wheeler also discussed Brexit and Trump’s victory (among others). But Wheeler concluded that:

“At this stage these developments do not cause us to change our view on the direction of monetary policy as outlined in the November MPS.”

And if y’all can still recall, Wheeler signaled that the RBNZ was less likely to cut further during the November policy statement and presser when he explicitly said that “there’s [only] a 20% probability of a further cut.”

Overall, a relatively upbeat speech that supports keeping rates steady for longer, which is why the Kiwi rallied. Some market analysts even go so far as reading a future 2017 rate hike in the cards, but that may be pushing it.

Anyhow, the Kiwi’s price action later began to diverge for no apparent reason on Friday. It was at this time that the Aussie and the Greenback both sneakily snatched victory from the Kiwi.

The Australian Dollar

AUD/USD: 1-Hour Forex Chart
AUD/USD: 1-Hour Forex Chart

AUD

The Aussie’s price action was pretty messy at the start. However, the Aussie later got broadly trounced when Australia printed a very disappointing Q3 GDP report. How bad? Forex Gump has the answer, so read it here.

Silly things like economic reports won’t keep the Aussie down, however, because the Aussie was apparently more interested in iron ore prices. And iron ore was surging on that day, allowing the Aussie to recover from its earlier slump (and then some). After that, the Aussie’s price action began to diverge, especially after Thursday’s ECB statement. However, the resulting risk-on vibes probably allowed the Aussie to score more wins than losses.

The Swiss Franc

USD/CHF: 1-Hour Forex Chart
USD/CHF: 1-Hour Forex Chart

CHF

As usual, the Swissy had a mixed performance and the overlaid price action of some Swissy pairs resemble spaghetti, or abstract art, or an indecipherable code, which indicate that opposing currency price action was dictating price action on Swissy pairs.

The SNB will have its monetary policy statement next week, so watch out. Actually, it’s usually a dud since SNB’s Jordan just usually complains that the Swissy is “still significantly overvalued” before threatening that the SNB is ready and willing to intervene in the forex market if needed. But, well, you never know if something new will happen, so just keep on your toes.

Okay, here’s this week’s scorecard:

This Week's Scorecard

And here’s last week’s poll results:

Last Week's Poll

The 17.14% who vote for the Loonie were right on the money although the 14.29% who voted for the Greenback would have done well as well. Unfortunately, another 14.29% voted for the yen, which has consistently been the worst-performing currency for several weeks now. Also, 28.57% voted for the pound, which had a severe reversal of fortune this week. Hopefully, you guys and gals were able to bail it out with just a scratch.

Okay, 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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