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?
Another week of pound domination and yen weakness were the main theme this week. Although we’ve also got Kiwi and Loonie strength as secondary themes. So, what was driving forex price action on these currencies? And how did the other currencies fare?
The Pound Sterling
Last week, I told y’all to keep an eye on the pound because the U.K. Supreme Court was expected to deliver a ruling by January 24, which could be another source of fun for the pound (or not). Well, that top-tier event was indeed a source of fun for the pound. Moreover, that event also helped propel the pound higher against ALL its peers this week.
Most pound pairs started the week on a strong footing, likely because of preemptive positioning, given that expectations were high that the government would lose the Supreme Court case. The pound then started to dip on Tuesday, as bulls who got in early started taking some profits off the table.
And when the ruling was finally announced that, as expected, the Court judged against the government’s authority to start the Brexit process without Parliament’s approval, the pound initially tried to jump on the good news, since the ruling would give anti-Brexit MPs a chance to get a “softer” Brexit. However, the ruling was a mixed blessing (for the anti-Brexit and/or pro-Single Market camps), since the Court also ruled that the U.K. government “has no legal obligation” to seek the approval of and/or consult with the devolved legislatures of Scotland, Wales, and Northern Ireland in order to start the Brexit process. As such, Scottish First Minister Nicola Sturgeon angrily reacted to the ruling by saying that another Scottish independence referendum “is becoming ever clearer.” Meanwhile, forex traders reacted by dumping the pound. Although profit-taking by the early bulls was also very likely.
The pound then slumped even harder after Brexit Secretary David Davis said in his prepared speech to Parliament that the government will present a Brexit Bill “within days” and that it would be “straightforward”, which is bad for anti-Brexit MPs, since that implies that the government plans to make it difficult to table amendments to the Bill, thereby making a so-called “hard” Brexit all but inevitable.
However, the pound later made a U-turn after Brexit Davis told Parliament that it will have “great influence” in the Brexit process, saying later that the planned Brexit Bill will be designed to allow for “substantive” amendments. These statement very likely revived expectations that anti-Brexit MPs would have a chance to fight for a “softer” Brexit, thereby sending the pound higher.
Moving on, there were no major catalysts for the pound on Wednesday, but it ended up extending its broad-based gains, very likely on optimism that the Brexit Bill would allow for amendments, as well as preemptive positioning ahead of the U.K.’s Q4 GDP report.
The pound rally continued on Thursday, but got cut short when the GDP report got released during Thursday’s morning London session. Both the quarter-on-quarter and year-on-year readings for the U.K.’s GDP growth were better-than-expected, but total growth for 2016 was only 2.0%, which is slower than 2015’s 2.2%. Moreover, this is the slowest pace of expansion since 2013, which is a bit disappointing and probably why forex traders decided to use the overall upbeat GDP report as a pretext to take some profits off the table. And things only got worse for the pound later on, since the U.K. government published the highly-awaited Brexit Bill, and it looked like this:
As you can see, the 133-word Brexit Bill is indeed very “straightforward”, just as Brexit Davis said. Furthermore, the Brexit Bill had a very tight timetable, with the second reading scheduled for next week (January 31 – February 1). The tight timetable would make it harder to introduce amendments, so much so that some anti-Brexit MPs bitterly complained that it’s “a disgrace” and that it “shows contempt for parliamentary sovereignty.”
Anyhow, post-GDP profit-taking and worries about the Brexit Bill continued to take its toll on the pound until Friday. Still, the pound already had a bountiful harvest during the course of the week, and so it ended up as the best-performing currency of the week.
Again, the second reading is scheduled for next week, so make sure to keep an eye on the pound, since that’s when the Parliamentary debates start, so chances are good that we’re gonna get some more fun from the pound next week. In addition, we’ve got a bunch of PMI reports, as well as the BOE statement, so all the more reason to keep an eye on the pound.
The Japanese Yen
Regular readers who have been around since November of last year may have noticed that I occasionally let slip my own bearish bias on the yen. Also, regulars may have noticed that I’ve been mentioning since November that the yen’s price action has been heavily linked to the ebb and flow of bond yields, particularly U.S. bond yields.
I’ve already explained this a few times before, so regulars may wanna skip this part. But for the newbies out there, the fundamental reason for this is that global bond yields rose when Trump won the race to the White House because the market’s focus turned to The Donald’s fiscal stimulus plans, which stoked risk appetite and demand for “riskier” assets/instruments, namely U.S. equities. However, this came at the expense of “safer” assets/instruments, namely U.S. bonds. And as you learned from our School’s lesson on How Bond Yields Affect Currency Movements, mass dumping of bonds means higher bond yields. And the rise in U.S. bond yields, together with the Trump-induced risk-on vibes and the Fed’s December rate hike, pushed global bond yields higher.
However, the BOJ’s monetary policy framework since the September 2016 BOJ statement has been the so-called “QQE With Yield Curve Control,” wherein the BOJ keeps Japanese government bond (JGB) yields close to 0% through unlimited bond purchases. And the BOJ doesn’t buy government bonds directly from the Japanese government. Instead, the BOJ buys ‘em with cash from financial institutions, mainly banks. Cash purchases, in turn, generally mean printing more yen, which weakens the yen. In addition, this has continually fueled expectations that the BOJ would step in whenever Japanese bond yields rise, which weakens the yen. Moreover, this has made Japanese bonds less attractive, which is also bad for the yen, not to mention the wider spread between Japanese bond yields and bond yields from other countries, which reduce the attractiveness of Japanese bonds even further.
With that out of the way, the yen was the weakest currency of the week this week after being the second weakest currency last week, which is awesome (well, for me it is).
The yen had a good start on Monday, thanks to the dip in U.S. bond yields, which was blamed by market analysts on safe-haven demand for bonds due to Trump’s protectionist trade plans. The yen then got its comeuppance on Tuesday when bond yields surged, thanks to mass dumping of bonds on returning risk-on vibes, which market analysts attributed to the U.K. Supreme Court’s ruling, positive Euro Zone data, and the U.S. equities rally on that day.
Global bond yields continued to rise on Wednesday, including the yields of JGBs, but reports came out that the BOJ unexpectedly refrained from buying short-term JGBs while maintaining the pace of its long-term JGB purchases. This apparently caused confusion among yen traders as to what the nefarious BOJ is scheming, which is why the yen traded sideways for the day instead of weakening further. Bond yields continued to rise on Thursday, though, so yen shorts ultimately won out. However, U.S. bond yields returned a large chunk of their gains later in the day, thanks to strong demand for 7-year bonds during the auction held on that day.
Conveniently for yen shorts, a Reuters report came out that the BOJ unexpectedly ramped up its purchases of 5-10 year JGBs, which clearly showed that the BOJ still intends to enforce its monetary framework, thereby causing the yen to weaken further instead of recovering. And this report and its implications apparently continued to weigh down on the yen on Friday, since bond yields also rose only to dip later when the U.S. printed disappointing GDP numbers.
Okay! On to the next currency! But before that, make sure to also keep an eye on the yen next week, since we’ve got the BOJ statement coming up on Tuesday.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The New Zealand Dollar
Depending on your data feed, the Kiwi either edged out a win against the Loonie, or the Loonie barely won out against the Kiwi. Either way, the implication is the same – both the Loonie and the Kiwi were in high demand for the week. Let’s start with the Kiwi first.
Most commodities were actually down for the week. Still, the higher-yielding Kiwi did pretty well, thanks to the prevalence of risk-appetite during the week, which market analysts mainly attributed to renewed optimism on Trump’s fiscal plans.
- Nikkei 225 (N225) closed 1.72% higher to 19,467.40 for the week
- Shanghai Composite (SSEC) closed 1.15% higher to 3,159.17 for the week
- Hang Seng (HSI) closed 2.07% higher to 23,360.78 for the week
- The Euro Stoxx 50 (STOXX50E) closed 0.10% higher to 3,302.62 for the week
- The DAX (GDAXI) closed 1.58% higher to 11,814.27 for the week
- The DOW (DJI) closed 1.34% higher to 20,093.78 for the week
- S&P 500 (SPX) closed 1.03% higher to 2,294.69 for the week
- Nasdaq Composite (IXIC) closed 1.90% higher to 5,660.78 for the week
Some market analysts also point to New Zealand’s better-than-expected CPI reading. I don’t agree with that, though, since the the Kiwi’s bullish knee-jerk reaction ultimately got faded, which implies that forex traders actually used that event as a pretext for some profit-taking.
Getting back on topic, U.S. dollar dynamics were also very likely in play, since the Greenback was a net loser this week, despite the rise in U.S. bond yields and U.S. equities ending the week on a high note. And as I’ve been pointing out for the past several weeks, a weaker Greenback usually means a stronger Kiwi. Also, U.S. dollar dynamics help to explain the Kiwi rally losing steam on Thursday despite persistent risk-on vibes, since that is when the Greenback regained its composure. Anyway, we’ll talk more about that more when we get to the Greenback.
The Canadian Dollar
The Loonie was the third best-performing currency of the week. Loonie pairs were tracking oil prices for the most part, and oil benchmarks ended the week in the green.
- U.S. crude oil (CLG6) up by 1.49% to $53.20 per barrel for the week
- Brent crude oil (LCOH6) up by 0.07% to $55.53 per barrel for the week
But as you can see on the chart above, oil’s price action was rather choppy while the Loonie just plowed through most of its forex rivals. Also, the Loonie appreciated broadly and significantly on Tuesday. What was that about? Well, this happened.
Signing orders to move forward with the construction of the Keystone XL and Dakota Access pipelines in the Oval Office. pic.twitter.com/OErGmbBvYK
— Donald J. Trump (@realDonaldTrump) January 24, 2017
The Keystone XL pipeline project, which runs from Alberta, Canada to the State of of Nebraska (with the ultimate destination being U.S. Gulf coast oil refineries), is expected to generate benefits for Canada to the tune of $2.4 billion per year, according to Reuters. And a large chunk of this would go to the good people of Alberta, who were hit the hardest by the great oil slump of 2014-2015. As such, this move is very positive news for the Canadian economy and the Loonie. However, Trump is Trump, so in the spirit of his “America First” policy, Trump also demanded that American materials be used for the pipes. Interestingly enough, only the Loonie got a bullish boost.
Anyhow, do note that trump’s Executive Order is only the first step. TransCanada, the would-be developer of the Keystone XL project, has also pushed this developing event forward by submitting its application for a presidential permit. Makes you wonder if speculators will keep the Loonie supported next week, or if further developments on this event will also further benefit the Loonie, huh?
The Australian Dollar
After being a net winner for several weeks, the Aussie’s winning streak finally came to an end this week. Not only that, the Aussie ended up as the second weakest currency of the week to boot.
And as you can see on the chart above (and if you look at your own charts), the Aussie had a mixed performance from Monday to Tuesday, but got slammed hard across the board during Wednesday’s Asian session. And the main catalyst for that was apparently the miss in Australia’s CPI reading, with CPI only increasing by 0.5% quarter-on-quarter (0.7% expected, same as previous) and 1.5% year-on-year (1.6% expected, 1.3% previous). The reaction was likely amplified because Australia CPI report is released on a quarterly basis, instead of the usual monthly basis, so the CPI report tends to have some heft to it.
Anyhow, Aussie pairs traded roughly sideways after that, with some diverging price action to boot, which implies that opposing currency price action dominated Aussie pairs.
The U.S. Dollar
As mentioned earlier, the Greenback was a net loser this week, despite the rise in U.S. bond yields, as well as the U.S. equity indices closing out the week in positive territory.
The Greenback started the week by sliding lower against its peers. And pretty much all market analysts attributed this to concern over Trump’s protectionist and populist inauguration speech. After that, the Greenback had a mixed performance on Tuesday and Wednesday, even as U.S. equities marched higher and U.S. bond yields rose. And market analysts blamed this on continuing concern over Trump’s protectionist attitude, as well as his focus on building the Great Wall of Trump and kicking out or keeping out illegals and unwanted immigrants, rather than on fleshing out his fiscal policies.
Basically, Greenback bulls and Greenback bears were playing a game of tug-of-war, as bulls tried to buy up the Greenback because of climbing U.S. equities and U.S. bond yields, while bears, who were disappointed with Trump’s actions, were trying their best to send the Greenback lower. The bulls finally gained the upper hand, though, as U.S. equities and U.S. bond yields continued to climb higher on Thursday.
Greenback demand then persisted during the first half of Friday, but Greenback bulls got spooked when U.S. GDP came in worse-than-expected, with U.S. Q4 GDP expanding by 1.9% quarter-on-quarter annualized, which is below the expected 2.2% increase. And looking at the GDP report, the slowdown was mainly due to net trade subtracting 1.70% from total GDP growth (+0.85% previous). This is actually widely expected. For instance, Forex Gump wrote in his Forex Trading Guide for the GDP report that “the available economic reports are pointing to a downturn in trade. And since trade was a major growth driver back in Q3, the poor readings for trade will likely weaken GDP growth” in Q4. Still, the GDP report was enough to dish out some pain on most Greenback pairs, which was enough to make the Greenback close out the week with a loss on some of its forex rivals.
By the way, the first FOMC statement of the year, as well as another NFP Friday, are on the docket for next week, so you may wanna keep tabs on the Greenback.
As usual, the euro’s price action was another choppy mess, with many euro pairs trading sideways for the entire duration of the trading week, which implies that opposing currencies were dictating price action on euro pairs.
The Swiss Franc
Also as usual, Swissy just as messy as (or messier than) that of the euro’s, so opposing price action was also dominant. Just like last week, however, the Swissy had a very noticeable instance of broad-based demand, as highlighted above.
As I noted in Thursday’s London session recap, this was rather weird because risk-taking was the dominant sentiment back then, so safe-haven demand for the Swissy should have been limited. Brexit jitters due to the release of the Brexit Bill is a possible reason for the Swissy’s strength. However the Swissy was already on the move a couple of hours before the Brexit Bill was published, so that’s not the likely reason. Anyhow, pretty strange stuff, and most analysts chose to just ignore that weird price action.
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!