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?
Half of the top 10 movers of the week are Loonie pairs, with the other half being Aussie pairs. Not only that, both currencies also happen to be winning out. And you can’t see it on the table of top 10 movers, but the Kiwi was a net winner this week as well. The main this week therefore appears to be comdoll domination. So, what was driving forex price action on the comdolls, as well as the other currencies?
The Canadian Dollar
Oil benchmarks were roughly unchanged for the week, so how did the Loonie manage to end up as the best-performing currency of the week?
- U.S. crude oil (CLG6) down by 0.02% to $53.71 per barrel for the week
- Brent crude oil (LCOH6) up by 0.02% to $56.83 per barrel for the week
Well, that was due mainly to three reasons. The first reason is that many Loonie pairs were in hibernation mode on Tuesday, which is when oil benchmarks plunged really hard thanks to the Greenback rally at the time, market analysts say.
But as highlighted on the chart above, the Loonie DID gain strength when oil benchmarks recovered on Wednesday. And that’s the second reason for the Loonie’s strong performance this week.
The surge in oil prices on Wednesday was attributed by market analysts to heavy speculation that U.S. oil inventories would print a large reduction come Thursday, as well as optimism after some OPEC members showed signs of complying with the oil cut deal. Incidentally, U.S. oil inventories reported a 7.1M barrel draw, significantly more than the expected fall of 1.8M barrels. However, oil’s bullish reaction was more muted while Loonie pairs had a more mixed reaction.
And finally, the third reason for the Loonie’s strong performance this week were the positive readings for Canada’s top-tier Friday releases.
Up first was Canada’s December jobs report, and it printed a solid 53.7K net increase in jobs, which is obviously better than the expected 5K loss. More importantly, the jobs gains were due to the 81.3K increase in full-time employment, which was partially offset by the loss of 27.6K part-time jobs. This is the first increase in full-time employment in three months and is the largest increase in full-time jobs in 43 months to boot. And while the jobless rate rose from 6.8% to 6.9%, that was due to the labor force participation rate jumping from 65.6% to 65.8%, so it ain’t really that bad.
Moving on, the other top-tier economic report was Canada’s November trade report, and it shows that Canada finally saw a trade surplus for the first time since October 2014.
The Australian Dollar
The Aussie was the second strongest currency of the week, barely losing out only to the mighty Loonie. And as you can see on the chart above, Aussie pairs captured the bulk of their gains from Monday until Thursday’s Asian session. Aussie pairs then had a more mixed performance while trading roughly sideways for the rest of the week.
So, what happened during from to Monday to early Thursday? Well, there were no major economic reports for Australia at the time. However, there was a commodities rally during that period, with base metals leading the way.
Demand for base metals really ramped up on Tuesday, thanks to strong Chinese demand, especially after China’s December manufacturing PMI reading from Markit/Caixin came in at 51.9, which is the best reading since January 2013. However, some market analysts also pointed to speculation that U.S. demand will rise. This is within the context of Trump’s planned fiscal stimulus, which includes investing in infrastructure. You know, the soon-to-be Southern Great Wall of Trump and all that.
The commodities rally on Wednesday and early Thursday, meanwhile, was fueled mainly by the Greenback’s retreat at the time, which made globally-traded commodities that are priced in dollars, relatively cheaper.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The New Zealand Dollar
The commodities rally from Monday to Thursday also apparently kept the Kiwi supported. However, there was a clear break on Tuesday. And this was very likely due to profit-taking by the bulls a few hours before the Global Dairy Trade (GDT) auction. The Kiwi then continued giving back its gains during the course of the dairy auction, before getting a final bearish kick when the auction ended with the GDT index down by 3.9%.
Oh, for those newbies other there who are wondering what milk has to do with the Kiwi, well, that’s because dairy products are New Zealand’s main exports. Concentrated milk alone, for example, accounts for around 18% of New Zealand’s exports.
Anyhow, all was right with the world again after that since Kiwi pairs began trending higher again until Thursday’s Asian session, before having a more mixed performance for the remainder of the week.
The Pound Sterling
The pound got the stuffing beaten out of it this week, despite a slew of mostly positive economic reports, including a set of very impressive PMI numbers.
- Manufacturing PMI: 56.1 (a 30-month high) vs. 53.2 expected, 53.6 previous
- Construction PMI: 54.2 (a 9-month high) vs. 52.5 expected, 52.8 previous
- Services PMI: 56.2 (a 17-month high) vs. 54.7 expected, 55.2 previous
What’s up with this weirdness, yo? Well, the pound apparently got swamped by renewed Brexit-related jitters.
As you saw on the chart earlier, pound pairs, with the exception of GBP/USD, have been trending lower since Tuesday’s U.S. session. So, what happened back then? Well, Sir Ivan Rogers, the U.K.’s ambassador to the E.U., called it quits. And he did so with a parting shot against Theresa May’s government through a leaked letter.
The juicy parts of the said letter that media outlets have latched onto, include the part where Sir Rogers tells his staff to “continue to challenge ill-founded arguments and muddled thinking” while apparently referring to Theresa May’s government. Another noteworthy and probably more important part is the hint that Theresa May’s government is not prepared for Brexit. To be more specific, Rogers wrote in his “I quit” letter that:
“We do not yet know what the government will set as negotiating objectives for the UK’s relationship with the EU after exit.”
This critique of Theresa May’s government and its lack of direction and preparation for an actual Brexit, as well as Sir Rogers’ departure itself, apparently reignited Brexit worries and weighed down on the pound during the course of the week, so much so that positive economic reports couldn’t prop it up.
The U.S. Dollar
The Greenback performed poorly this week. And based on how the Greenback performed, you may even think that opposing currency price action was more dominant.
However, as you can see on the chart above, there was some rather uniform price action across Greenback pairs. Anyhow, the Greenback had a mixed start but was already winning out against most currencies on Tuesday, with the exception of CAD and AUD. Demand for the pound was driven by optimism that the Fed will keep hiking rates as the U.S. economy continues to improve, market analysts say, and this optimism got reinforced after ISM printed a solid manufacturing PMI reading. However, speculators later began taking some delicious profits off the table, apparently as a precaution of top-tier reports lined up for the week. As such, the Greenback began to tank across the board on Wednesday.
And the minutes of the December FOMC meeting did not help in any way at all. Well, I guess it helped Greenback bears steal more pic-a-nic baskets full of pips. Did you get the reference to Yogi Bear? No? Man, I’m old. By the way, Forex Gump has his own take on the FOMC meeting minutes, and you can read it here. His write-up is, as usual, pretty good, but we have differing opinions on what drove the Greenback lower.
Forex Gump’s main contention is that the market is disappointed that “almost all” Fed officials have already priced-in Emperor Trump’s planned fiscal stimulus, since that means we’ll only get three rate hikes at best – there’s little room for more than three rate hikes, although Forex Gump did note that the Fed had the usual caveats.
Anyhow, In my own opinion, the most important takeaway, at least with regard to the Greenback’s price action and the future path of monetary policy is that the minutes revealed that a stronger Greenback may be a problem, and that there was uncertainty with regard to the effect of fiscal policy on economic outlook and, by extension, monetary policy, thereby eroding expectations that the Fed can deliver on up to three 25 bps rate hikes this year.
To quote the minutes directly (emphasis mine):
“In their discussion of their economic forecasts, participants emphasized their considerable uncertainty about the timing, size, and composition of any future fiscal and other economic policy initiatives.”
“Several participants pointed out that, depending on the mix of tax, spending, regulatory, and other possible policy changes, economic growth might turn out to be faster or slower than they currently anticipated.”
“Among the downside risks cited were the possibility of additional appreciation of the foreign exchange value of the dollar, financial vulnerabilities in some foreign economies, and the proximity of the federal funds rate to the effective lower bound.”
“Several participants also commented on the uncertainty about the outlook for productivity growth or about the potential effects of tight labor markets on labor supply and inflation … several others pointed out that a further rise in the dollar might continue to hold down inflation.”
“It was also noted that fiscal and other policies were only some of the many factors that could influence the economic outlook and thus the appropriate course of monetary policy. Moreover, many participants emphasized that the greater uncertainty about these policies made it more challenging to communicate to the public about the likely path of the federal funds rate.”
There are more where that came from, but it’s very clear from the above that the Fed (well, several Fed officials at least) thinks that a stronger Greenback could be problematic, especially for inflation. Weaker inflation growth = fewer rate hikes. Also, the Fed keeps mentioning uncertainty with regard to the effect of future fiscal policy on the economic outlook and the path of monetary policy. Higher uncertainty = more excuses to delay hiking rates, just like last year.
Anyhow, other than the FOMC meeting minutes, some market analysts also claim that the surge in the Chinese yuan helped to propel the Greenback lower against its peers on Thursday.
After that the Greenback began to recover, likely due to short covering ahead of the NFP report. The recovery later became a full-blown rally that allowed the Greenback to greatly reduce its losses. Still, the Greenback’s earlier declines meant that the Greenback was a net loser for the week.
By the way, Forex Gump has reviewed the NFP report. You can read his review here. The gist of it all, though, is that the reading for non-farm payrolls came in at 156K, which is well below expectations. However, the reading is still above the unofficial 100K “floor”, which is the number of jobs needed to keep up with working-age population growth and is therefore the magic number for keeping rate hike expectations alive. Also, wage growth was relatively impressive, which reinforced rate hike expectations further, thereby stroking demand for the Greenback.
By the way, make sure to keep an eye on the Greenback since we’ll be getting the retail sales report next week. Also, many voting FOMC members will be giving speeches next week, including Fed Head Yellen herself.
The Japanese Yen
The Japanese yen was, as it has been for the most part since November 2016, a net loser for the week. Also as usual, the Japanese yen’s price action was tied mostly to bond yields, particularly U.S. bond yields. As such, the yen advanced on Wednesday and Thursday when U.S. bond yields dropped hard, thanks respectively to the FOMC meeting minutes and the disappointing ADP report, market analysts say.
The yen’s advance got cut short on Friday, probably because of profit-taking ahead of the NFP report. And unfortunately for yen bulls, the NFP report caused U.S. bond yields to snap back higher. The return of the yen’s nemesis – rising bond yields – likely scared the shorts off yen bulls, since the yen switched from being a net winner pre-NFP to being a net loser for the week post-NFP. Poor yen! Not that I’m complaining or anything.
The euro’s price action was a jumbled mess, with plenty of diverging price action. This indicates that, for the most part, opposing currency price action was dictating how euro pairs moved. It’s therefore no surprise that the euro had a mixed performance for the week.
Despite the messy price action, however, we can see that there was some rather uniform directional movement at least. As you can see on the chart above, euro pairs tanked on Monday and Tuesday before broadly grinding higher from Wednesday until Thursday and then becoming chaotic on Friday, especially after the NFP report.
The euro’s price action appears to be linked to risk sentiment. Oh, for those who don’t, the euro is a major funding currency. The idea is that borrowing costs are cheaper in the Euro Zone, so investors borrow in euros to fund trades on higher-yielding and/or riskier asset classes or instruments. As such, the euro usually acts somewhat like a safe-haven currency, rising during risk-off times and weakening during risk-on times. Technically, the euro is not a safe-haven currency, though, given the ongoing European debt crisis and all that.
Getting back on topic, risk appetite was the dominant sentiment until Tuesday. Risk sentiment then began showing signs of turning sour come Wednesday. Risk sentiment was a bit more mixed on Thursday, but leaning more towards risk aversion, with the Nikkei down, Chinese and Southeast Asian equities in positive territory, European shares mostly down, and Wall Street down by the end of the day. As for Friday, risk aversion appeared to be the dominant sentiment as well, at least before the NFP report. After the NFP report, however, risk appetite became the more dominant sentiment as European equities recovered from their earlier losses while U.S. equities ended the day with some gains.
The Swiss Franc
The Swissy’s price action was just as messy as that of the euro’s. And just like the euro, the Swissy’s overall directional movement was apparently linked to how risk sentiment evolved during the course of the week.
Okay, here’s this week’s scorecard:
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!