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?
Just one glance at the table of top 10 movers and you can already tell that Loonie’s weakness was the main theme this week, given that 7 of the top 10 movers are CAD pairs, with the Loonie losing in each and every one of ‘em.
Other than that, we’ve also got pound domination as this week’s main theme.
The Canadian Dollar
Oil benchmarks initially tried to rally after Saudi Arabia promised that it would stick to the oil cut deal, but got torpedoed on Wednesday, thanks to increased worries that U.S. oil output would rise.
However, oil later rebounded on Thursday and Friday, thanks respectively to an optimistic report from the IEA and heavy speculation ahead of OPEC’s Vienna meeting this weekend.
- U.S. crude oil (CLG6) up by 1.57% to $53.19 per barrel for the week with $50.91 as an intraweek low.
- Brent crude oil (LCOH6) was essentially unchanged at $55.45 per barrel for the week after rebounding from a low of $53.77
But as you saw on the list of top 10 movers earlier, the Loonie got its butt kicked real hard across the board this week. What’s up with that? Well, that was due to the BOC statement.
The short of it, though, is that the Canadian economy has been seeing some improvements recently, so expectations were rather high that the BOC would either be a bit more optimistic or maintain its neutral tone.
Instead, the BOC statement sent some rather dovish vibes. Even worse, the BOC now appears to have an easing bias when BOC Governor Stephen Poloz said that (emphasis mine):
“So, in that context, especially with inflation having been below target for a prolonged period, yes, a rate cut remains on the table and it would remain on the table for as long as downside risks are still present.”
Interestingly enough, the BOC actually upgraded its GDP growth projections. In fact, the BOC even upgraded its CPI forecast for 2017. However, Poloz admitted that there was higher uncertainty and they are linked mostly to a Trump presidency and how Trump’s trade policies would affect Canada. After all, NAFTA also includes Canada, not just Mexico.
Moving on, oil also started slumping hard on Wednesday, as mentioned earlier. And that also likely weighed down on the Loonie. However, when oil started to rally, the Loonie opted to continue its broad-based retreat against its peers.
This diverging price action between the Loonie and oil is glaringly visible on Friday. There was no clear reason for this wonky price action, though. There were relatively poor economic reports on Friday, but the Loonie’s reaction to their release was rather muted, so I don’t think they were a factor.
It is possible, however, that market players were still disappointed with the BOC or that they were just wary of loading up on the Loonie ahead of and during Trump’s inauguration. The BOC’s dovish tone can mostly be traced back to Trump after all.
The Pound Sterling
The pound was on the receiving end of a severe pounding last week. However, the pound had a reversal of fortune this week, and so the pound ended up doing the stomping instead.
The pound actually started the week on a very weak note, with all pound pairs gapping lower. And that was due to very heavy speculation on what British PM Theresa May had to say on Tuesday.
And it certainly didn’t help (pound bulls) those media outlets, such as the BBC, The Times, The Telegraph, and many others, decided on Sunday to talk about what Theresa May has in store, and they all thought that the PM would likely guide the U.K. out of the E.U. Single Market.
Anyhow, the pound then behaved itself for the rest of Monday, as forex traders hunkered down for Theresa May’s Tuesday speech. However, media outlets such as The Telegraph and Bloomberg released what they claimed to be snippets of Theresa May’s leaked speech during Monday’s late U.S. or Tuesday’s early Asian sessions, including her 12 Brexit objectives.
And pound shorts apparently used that as an excuse to take profits off the table, given that the leaked speech stated that Theresa May is indeed planning to pull out of the E.U. Single Market.
And the leaked speech wasn’t a fake, as it turns out because Theresa May later confirmed in her actual speech that she plans to take the U.K. out of the E.U. Single market when she explicitly said that:
“But I want to be clear. What I am proposing cannot mean membership of the E.U.’s Single Market.”
By the way, if you want to know about Theresa May’s 12 Brexit Objectives, as well as the key takeaways from her speech, Forex Gump has a write-up about it here.
The gist of it all, though, is that Theresa May removed sources of uncertainty. And she did so by saying that she will not seek a transitional deal during the Brexit negotiations.
Instead, she proposes a “phased process of implementation” although we have to wait and see if the E.U. would agree to that proposal. May also removed some uncertainty by clearly stating her objective that she has no plans to pursue continued membership in the E.U. Single Market.
Instead, she plans to negotiate a free trade agreement with the E.U., so that the U.K. can continue to have access to the E.U. Single Market and vice versa.
She also plans to renegotiate the U.K.’s membership in the E.U. Customs Union so that the U.K. can be free to greatly expand its trading potential through trade deals with other countries.
Finally, the PM announced that Parliament will get to vote on the final Brexit deal, which means that anti-Brexit MPs can have their say if the Brexit deal is bad in their view, thereby lessening the chance of a potential “hard” Brexit and pre-empting any future legal challenges.
Moving on, the pound later dipped across the board on Wednesday, very likely due to profit-taking.
Interestingly enough, pound pairs then spent the rest of the week either climbing even higher or trading roughly sideways. Makes you wonder how the pound will fare next week, eh?
By the way, I mentioned last week that there were expectations that the U.K. Supreme Court would rule on the government’s authority to trigger Article 50 of the TEU this week.
As it turns out, the Supreme Court is now expected to deliver a ruling by January 24, which is Tuesday next week. That could be another source of fun for the pound (or not). Anyhow, you may wanna keep an eye on the pound, just in case.
The Australian Dollar
The Aussie has been on a winning streak lately. This week, it managed to end up as the second strongest currency after the pound. Other than on AUD/CAD, the Aussie’s wins are admittedly rather small, though.
Anyhow, Aussie pairs had a rather mixed performance from Monday to Tuesday but staged a broad-based rally from Wednesday to Thursday (with the exception of AUD/USD). And incidentally, this is when most Aussie pairs captured the bulk of their gains.
The broad-based Aussie rally on Wednesday was likely spurred by the rise in iron ore prices at the time. Interestingly enough, the iron ore rally stalled on Thursday, but the Aussie continued its upwards trajectory. And that was apparently thanks to Australia’s December jobs report.
You see, Australia’s jobless rate climbed from 5.7% to 5.8%, which is the highest reading since June 2016. However, that was due to the participation rate also rising from 64.6% to 64.7%.
This marks the second month of improvement in the participation rate and likely means that more Australians are getting encouraged to join the labor force.
Also, Australia was only expected to print a 10.2K increase in employment, but 13.5K jobs were generated instead. Moreover, 9.3K came from full-time employment while 4.2K came from part-time employment, and gains in full-time employment are always great.
Moving on, price action on Aussie pairs then became more mixed on Friday, indicating that opposing currencies were likely in charge.
The U.S. Dollar
The Greenback was a net loser this week. But as you can see on the above chart, there was decent two-way price action during the course of the week.
The Greenback had a steady start but got a severe beating across the board on Tuesday. Tuesday’s beat-down was blamed by practically all market analysts on a Wall Street Journal article that cited Trump as saying during an interview that:
“Our [U.S.] companies can’t compete with them [China] now because our currency is strong and it’s killing us.”
Trump was basically talking down the Greenback and market analysts say that was the prime catalysts. Interestingly and amusingly enough, the interview was conducted last Friday.
There’s even a January 14 (Saturday) Reuters article that talked about Trump’s interview. And the said Reuters article also cites the parts where Trump was talking down the dollar. Well, think of that what you will.
Moving on, the Greenback regained some poise on Wednesday, probably because of profit-taking.
However, the recovery later turned into a rally, thanks to Fed Head Yellen’s speech, which market analysts interpreted as hawkish and supportive of speeding up the pace of hiking rates. This part of Yellen’s statement, in particular, is worth mentioning.
“Waiting too long to begin moving toward the neutral rate could risk a nasty surprise down the road–either too much inflation, financial instability, or both.”
After that, price action on the Greenback diverged a bit before uniformly getting trounced during Thursday’s U.S. session, thanks to another speech from Fed Head Yellen.
This time, market analysts interpreted Yellen’s speech as being less hawkish-than-expected. This part of Yellen’s speech, in particular, is glaringly not that hawkish at all (emphasis mine).
“I would mention the potential for changes in fiscal policy to affect the economic outlook and the appropriate policy path. At this point, however, the size, timing, and composition of such changes remain uncertain. However, as this discussion highlights, the course of monetary policy over the next few years will depend on many different factors, of which fiscal policy is just one.”
Anyhow, the Greenback then got bid up again during Friday’s morning London session, as forex traders waited for Trump’s inauguration, only to slide back down later, probably because market players were disappointed that Trump opted to give a populist message, rather than on a pro-growth message.
The Japanese Yen
The yen had a strong week last week, which was a real disappointment (well, to me it was). This week, however, yen weakness returned (woohoo!).
As usual, the yen’s price action is still linked to bond yields, particularly U.S. bond yields, so the yen traded sideways when U.S. bond yields were flat on Monday.
The yen finally got some action on Tuesday as U.S. bond yields fell due to safe-haven demand for bonds. Market analysts blamed this on Trump’s comments about the strong dollar, which we talked about, as well as Brexit jitters due to Theresa May’s speech, which we also talked about earlier. As a result, the yen got bid up on most pairs, with GBP/JPY as a clear exception.
Next, the yen got whupped on Wednesday when bond yields rebounded on Fed Head Yellen’s comments. Bond yields continued to rise on Thursday, so the yen got another round of whupping.
However, U.S. bond yields dipped on Friday, which allowed the yen to recover some of its losses. And market analysts blamed this on disappointment that Trump didn’t really talk much about fiscal measures, opting to deliver a populist message instead.
The New Zealand Dollar
The Kiwi is still acting as sort of an anti-dollar, so it traded roughly sideways when most Greenback pairs were also trading somewhat sideways on Monday.
When the Greenback tanked on Tuesday, supposedly on Trump’s comments, the Kiwi used that as an opportunity to climb higher. And when the Greenback regained strength on Wednesday, the Kiwi got broadly slapped lower.
Thursday is a bit weird, though, because the Greenback had a more mixed performance then, but U.S. dollar dynamics were still likely in play in that bullish pressure on NZD/USD helped lift other Kiwi pairs. And the same can probably be said on Friday’s reversal.
As usual, the euro’s price action was a complete mess, with many euro pairs trading sideways for the entire duration of the trading week.
The euro did get broadly dumped on Thursday, thanks to ECB Overlord Draghi’s statement that the ECB has no plans to taper its QE program yet and that while the ECB is planning to scale back its extended asset purchases, scaling back does not mean tapering.
Anyhow, Draghi’s words didn’t really have a lot of sticking power, since most euro pairs quickly recouped their losses from the Draghi-induced dump.
The Swiss Franc
The Swissy ended up being a net winner this week. However, price action on the Swissy was as messy as that of the euro’s, with the exception of the broad-based Swissy rally on Friday.
As such, it’s probably safe to say that opposing currencies dominated price action on Swissy pairs, and it just so happens that the Swissy got lucky.
There is that broad-based Swissy rally on Friday, though. There was no catalyst for the Swissy back then and both European equities and U.S. equities were mostly in the green, which implied some risk-taking – an unfriendly environment for the safe-haven Swissy.
However, I did mention earlier that U.S. bond yields fell after Trump gave a populist message, rather than a pro-growth one.
The only problem is that U.S. bond yields fall if it is bond-buying aplenty, and bond-buying is usually a sign of risk aversion.
The likely reason for this is that bonds were getting bought up, not necessarily because of risk-aversion, but because of the uncertainty that a Trump presidency brings.
And safe-haven flows due to this uncertainty also very likely fueled demand for the Swissy on Friday. Well, that’s my take anyway, so feel free to drop a comment if you have something else in mind.