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?
Forex traders went on a Kiwi hunting expedition this week (for the currency, not the bird). And forex traders apparently managed to take down their target, since the Kiwi was the worst-performing currency of the week, with half of this week’s top 10 movers being Kiwi pairs to boot. Other than that, the battle for supremacy between the pound and the Greenback was also a major theme this week.
The New Zealand Dollar
The Kiwi got dumped across the board this week, ending up as the worst-performing currency of them all. And the Kiwi suffered the bulk of its losses in the aftermath of the RBNZ statement. Forex Gump already has a write-up on that, so read it here, if you want the juicy details.
The gist of it all, though, is that market players were expecting the RBNZ to have a more hawkish tune. You see, New Zealand’s economy is one of the more robust among the developed economies. In addition, New Zealand has been getting mostly positive economic reports lately, with the Q4’s annual CPI reading of 1.3% being the most important one, since it showed that headline CPI was finally within the bottom range of the RBNZ’s target range of 1-3%.
Given all that, expectations were high that the RBNZ would be a bit more hawkish, or even signal the possibility of a rate hike in the near future, with most economists expecting a rate hike by 2018. However, the RBNZ didn’t shift to a hiking bias as expected. Instead, the RBNZ chose to adopt a neutral monetary policy bias, which is pretty disappointing. But to add fuel to the flames, RBNZ Governor Wheeler also flat out told the market that the market’s rate hike expectations were “a bit ahead,” which is a nice way of telling the market that the market is wrong.
And the RBNZ’s own projections for the OCR’s path showed that the RBNZ plans to keep the OCR steady for a long while, with the earliest possibility of a rate hike not coming until the latter half of 2019. This is obviously a much longer wait than what the market was expecting. Moreover, the RBNZ also downgraded its CPI projections for 2017, “reflecting volatility in fuel prices and the high exchange rate.” That’s right! The RBNZ is also blaming the strong Kiwi. Anyhow, those same reasons for the downgraded readings in 2017 are also the reasons why the RBNZ pushed back it’s forecast for when it would hit the median of its inflation target range (Q2 2019 vs. Q4 2018 originally).
Overall, the February RBNZ statement was pretty disappointing. And as a result, disappointed market players reacted by dumping the Kiwi.
The Pound Sterling
The pound staged a major comeback this week after getting dethroned last week. The pound actually had a wobbly start, though, as last week’s themes continued to play out, particularly disappointment over the BOE’s lack of inclination to budge from its neutral bias, despite upgrading its economic projections during the February BOE statement.
The pound then got kicked lower on Tuesday when mortgage lender Halifax Bank of Scotland released its House Price Index (HPI), showing that British house prices tumbled by 0.9% month-on-month in January after surging by 1.6% previously and contrary to expectations that house prices would only flatten out. In addition, January’s drop is the first drop in five months.
That was the final salvo from the bears, though, since BOE MPC Member Kristin Forbes later had a speech and she said the following (emphasis mine):
“In my view, if the economy remains solid and the pick-up in the nominal data continues, this could soon suggest an increase in Bank Rate.”
Boom! Forbes’ statement diverges from the BOE’s main message during the BOE statement that future rate hikes were not very likely. And this was apparently all that the market needed to hear to start buying up the pound.
After that, the pound steadied a bit, probably because market players were waiting for the Parliamentary debates on the Brexit Bill to finish. And as it turns out, the Brexit Bill did manage to clear the House of Commons with a 494-122 majority vote. This very likely removed a great deal of Brexit-related uncertainty. However, the Brexit Bill passed without any amendments. None, zlich, zip, nada. This is bad, according to the current narrative, because it will put the U.K. in a bad spot with regard to trade with the E.U.
Given these conflicting signals, it’s understandable why the pound initially didn’t go anywhere on the announcement. However, the pound began climbing higher a couple of hours later, even though there weren’t any direct catalysts.
Market analysts would later say that expectations were building up that the Brexit Bill would also pass through the House of Lords smoothly, which likely eased Brexit-related uncertainty. In addition, unnamed sources being cited by Reuters said that peers in the House of Lords will try their best to get more say in the Brexit negotiation process once scrutiny of the Brexit Bill starts on February 20, which likely stoked expectations that a “hard” Brexit could be avoided. Anyhow, the pound’s price action became more mixed after that final broad-based rally.
The U.S. Dollar
Depending on your data feed, the Greenback either edged out a win against the pound or barely lost out to the pound. Either way, the Greenback still ends up as one of the best-performing currencies of the week.
The Greenback started the week on a strong footing, although it did have a hard time against the yen, but we’ll talk about that later. Getting back on topic, the source of the Greenback’s strength was apparently Philadelphia Fed President Patrick Harker’s comments on Monday, particularly these ones.
“I still am supportive of three rate hikes this year, of course with a major caveat, depending on how the economy evolves and policy, fiscal policy, evolves.”
“I think March should be considered as a potential for another 25-basis point increase.”
Harker is a voting FOMC member this year, so his hawkish words have extra “oomph” when it comes to the direction of monetary policy. Moving on, the Greenback then dipped a bit on profit-taking, but Harker’s hawkish rhetoric continued to fuel the Greenback’s rise on Tuesday, although some market analysts also point to bearish pressure on the euro, particularly on EUR/USD, giving the Greenback a lift.
The Greenback then milled about on Wednesday before getting another broad-based bullish boost on Thursday, thanks to Trump. To be more specific, Trump said that he would be announcing “something phenomenal in terms of tax” over “the next two or three weeks.” This apparently reignited optimism for his fiscal stimulus plans, which then spurred demand for the Greenback.
The Other Currencies
Okay, here’s how the other currencies fared this week:
After several weeks of mixed and messy price action, euro pairs finally showed uniform price action from Monday to Wednesday, as euro pairs steadily slid lower across the board.
Market analysts were pretty unanimous in blaming the euro’s broad-based weakness to political uncertainty in Europe, with upcoming German and French elections in focus.
As for specifics, the latest poll results from opinionway show that the anti-EU Front National’s Marine le Pen is now expected to come out on top during the first round of the French presidential elections. Le Pen is still expected to lose during the second round, though.
In Germany, meanwhile, the latest poll results from Bild newspaper show that Angela Merkel’s Christian Democrat Party was now in second place for the first time since 2010, with 30%. The Social Democrats came in first place, with 31%. Meanwhile, the anti-EU Alternative for Germany was closing the gap, coming in third with 12%.
Unfortunately, euro bears apparently finally ran out of steam after three straight days of kicking the euro lower, since the euro’s price action began to diverge on Thursday, which shows that opposing currencies were now in control of euro pairs. Still, the damage was already done, and so the euro ended up as the second weakest currency of the week this week.
The Australian Dollar
The Aussie was a net winner yet again this week. However, the Aussie’s gains weren’t due to the RBA statement. The RBA statement did cause the Aussie to jump higher. However, that didn’t have a lot of sticking power, since the Aussie began trading roughly sideways after that. By the way, you can read Forex Gump’s write-up on the key highlights of the RBA here, if you’re interested.
Anyhow, as marked on the chart above, the Aussie started its broad-based ascent on Thursday, which is two days after the RBA statement. What happened on Thursday, you ask? Well, RBA Governor Philip Lowe was giving a speech about Australia back then. Lowe’s speech, which you can read here, was actually just a sales pitch to investors at the A50 Australian Economic Forum dinner, and there wasn’t really anything new or market-moving.
However, Lowe had a little Q&A session after his speech, and he had these very interesting things to say (emphasis mine):
“It’s hard to say that the exchange rate is fundamentally too high. If the global outlook were to change and the exchange rate/interest rate combination led to growth being downgraded, then you could make the case that the exchange rate was too high. But at the moment I struggle to say the configuration is leading to growth outcomes that aren’t satisfactory.”
This is in stark contrast to the RBA’s usual line that “An appreciating exchange rate would complicate this adjustment,” referring to the Australian economy’s ongoing transition after the mining boom.
And since risk appetite was the dominant sentiment and commodities were rallying pretty hard at the time, market players apparently used Lowe’s words as a go-signal that it’s A-okay to load up on the higher-yielding comdoll.
The Canadian Dollar
The Loonie had a mixed performance this week, but Loonie pairs actually had roughly uniform, two-way price action during the week. If you can still remember, the Loonie had a rather wonky week last week. This week, however, all became right with the Loonie again, since Loonie pairs were mostly tracking oil prices once more.
As you can see on the chart above, oil fell on Monday and Tuesday (oil’s chart is inverted), dragging the Loonie with it. And the drop in oil prices was attributed by market analysts to severe disappointment on news that the number of U.S. oil rigs rose to a high not seen since October 2015. Oil’s weakness was also made worse by heavy speculation that U.S. oil inventories would be printing a large build-up.
Oil and the Loonie finally regained some poise on Wednesday, thanks to short-covering, market analysts say. And this does indeed seem to be the case, since oil prices rose further when the U.S. Energy Information Administration (EIA) released its official inventory numbers, showing a 13.8 million barrel rise and confirming earlier speculation.
Further short covering on Thursday kept both oil and the Loonie afloat on Thursday. However, oil likely got buoyed by actual demand on Friday, since it began to move higher after reports began to circulate that oil producers were complying with their obligations for the OPEC oil cut deal. Most Loonie pairs held their ground while oil prices soared, though, very likely because market players were waiting for Canada’s jobs report to come out. And as it turns out, Canada’s January jobs report delivered an upside surprise (+48.3K vs. -10.0K expected, 53.7K previous), so the Loonie got a final bullish boost.
The Japanese Yen
As usual, yen pairs were mostly tracking bond yields again, particularly U.S. bonds yields, as you can see in the chart below. The yen had a mixed performance this week, though.
The yen had a good start, thanks to falling bond yields on Monday, which market analysts attributed to political uncertainty in Europe and disappointment over Trump’s plans, which stoked safe-haven demand for bonds. These themes continued to play out on Tuesday, which sent bond yields lower still. Instead of gaining further ground, however, the yen had a more mixed performance as it weakened during the London and U.S. sessions, thanks to signs of risk taking in both the European equities market and U.S. equities market, due to a slew of mostly positive earnings reports that gave both a boost.
Wednesday was similar to Tuesday, with bond yields falling once more. The yen managed to advanced a bit this time, but was very reluctant to do so, thanks to persistent risk-taking in Europe due to another round of positive earnings reports.
Thursday saw yet another round of risk-taking in Europe due to yet another round of positive earnings reports. This time, however, the yen REALLY felt the pain because bond yields also surged, thanks to Trump’s announcement about his tax plans, which we already talked about earlier when we discussed the Greenback. As a result, most yen pairs ended up erasing their gains from the past three days. Poor, poor yen. Not that I’m complaining or anything.
After that, bond yields stabilized on Friday while risk-taking persisted. The yen had a more mixed performance, though, but was mostly stronger for the day, likely because yen bears who caught a ride on Thursday were taking delicious profits off the table (woo hoo!), especially ahead of the meeting between Japanese PM Shinzo Abe and U.S. President Donald Trump.
The Swiss Franc
As usual, the Swissy’s price action was pretty messy, which indicates that opposing currency price action dominated Swissy pairs.
There were some semblance of uniform price action on Thursday and Friday, though, which is when risk appetite was very clearly the prevalent sentiment, with both equities and bond yields rising. And the safe-haven Swissy likely weakened because of that.
Okay, here’s this week’s scorecard:
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!