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?
The percentage changes on all currency pairs were relatively small this week, which may have disappointed longer-term traders.
Shorter-term traders likely had a blast, though, since many currency pairs gave decent two-way action during the course of the week, as you’ll see later below.
Having said that, the yen ended up on top while the pound got dethroned once again after briefly regaining its throne last week.
So, what drove forex price action? And how did the other currencies fare? Well, read on and find out.
The Pound Sterling
Wow! I just noticed that the pound has usually either been at the very top or at the very bottom in terms of overall performance during the past few weeks. Anyhow, the pound got thrown to the very bottom of the pile (again) this week after staging a major comeback last week. And pound bears can thank three disappointing top-tier economic reports for the pound’s weakness this week.
The pound had a mixed start but was mostly stronger on Monday. And market analysts attributed this to speculation ahead of the U.K.’s top-tier economic reports, as well as continued optimism after last week’s pound-related events.
Unfortunately for pound bulls (and happily for pound bears), the pound got clobbered on Tuesday, thanks to the U.K.’s disappointing January CPI report. According to the CPI report, the U.K.’s CPI saw a 1.8% year-on-year increase. This is a faster rate of annual increase than December’s 1.6%, as well as the fastest annual rate of increase since June 2014. However, the actual reading is a miss from the expected +1.9%.
The details of the CPI report were also rather telling since the main driver for the faster increase in January were the higher costs of transportation (+5.7% vs. +3.7% previous) and the softer fall in the price of food and non-alcoholic beverages (-0.5% vs. -1.1% previous).
And the higher cost of transportation, in turn, was due mainly to the 3.4% surge in motor fuels. Changes on the other components only had minimal impact.
Anyhow, the price of food and non-alcoholic beverages, as well as transportation costs, are stripped from the core reading, which is why the core reading held steady at 1.6%. However, expectations were for the core reading to tick higher by printing a 1.7% increase.
The miss in both the headline and the core readings were apparently taken as signs of Brexit-related troubles. Moreover, they also weakened expectations for a future BOE rate hike, market analysts say.
Moving on, the pound got slapped around again on Wednesday, thanks to the U.K.’s latest jobs report. The jobs report actually presented a mixed picture since the jobless rate held steady at 4.8% in the three months to December. This is the lowest reading since the July-September 2005 reporting period, which is great.
In addition, the employment rate ticked higher to 74.6%, which is a new record high. Finally, the number of people claiming unemployment benefits fell by 42.4K in January.
Those were the good bits. As for the disappointing parts, they all had to with wage growth. To be more specific, nominal average weekly earnings (bonuses included) grew by 1.9% year-on-year in December, with a three-month average of 2.6%.
This is the weakest year-on-year increase since February. Also, the three-month average was expected to maintain the previous three-month average by coming in at +2.8%, but it dipped instead.
The disappointing wage growth is even more disappointing in real terms (inflation is taken into account). Real average weekly earnings (including bonuses) only increased by 0.2% year-on-year in December, which is a drastic slowdown from the previous 1.9% increase.
It’s also way below the average annual increase of real average weekly earnings in 2016, which is +1.7%. Moreover, this is the poorest annual reading since August 2014. The three-month average, meanwhile, came in at 1.4%, which is the poorest since February 2015.
This means that the purchasing power of the average Brit suddenly nosedived, which will likely hurt consumer spending and GDP growth somewhere down the line.
And market analysts were quick to point out that the disappointing wage growth only reinforces the BOE’s neutral monetary policy, thereby dampening rate hike expectations even further.
After that, the pound had a mixed performance on Thursday but was mostly weaker as the pain from the disappointing economic reports lingered. The pound then got a final kick lower on Friday, thanks to the U.K.’s January retail sales report.
According to the retail sales report, retail sales volume fell by 0.3% month-on-month between December and January. This is severely disappointing because expectations were for a 1.0% increase. Moreover, December’s reading was downgraded from -1.9% to -2.1%, which is the sharpest monthly fall since May 2011.
The year-on-year reading also disappointed with a 1.5% increase, which is a very significant miss from the +3.4% consensus. In addition, this is the weakest annual increase since November 2013. And the signs of weaker consumer spending were taken as a reality check on Brexit, and reality is no longer looking too good.
The Japanese Yen
Yen pairs were tracking bond yields once again, for the most part, particularly U.S. bond yields. And as you can see below, U.S. bond yields had decent two-way action this week, with the yen following suit.
Bond yields rose on Monday due to lower safe-haven demand for bonds and higher demand for equities ahead of Yellen’s testimonies, market analysts say. As a result, the yen was also mostly weak.
Bond yields steadied ahead of Yellen’s first day of testimonies on Tuesday, but the yen was steadily clawing its way higher across the board, very likely because of returning risk aversion in Europe. However, yen bulls would get swept away later when bond yields surged after Fed Head Yellen said in her prepared speech that “waiting too long to remove accommodation would be unwise.”
Moving on, bond yields initially rose on Wednesday, thanks to positive U.S. economic reports, market analysts say. However, bond yields started dropping later, which allowed the yen to start its counter-attack.
Bond yields continued to plunge on Thursday, so the yen just plowed through its forex rivals. And according to market analysts, bond yields were sliding due to safe-haven demand for bonds as equities tumbled, as well as fresh buyers for U.S. bonds, thanks to the recent surge in U.S. bond yields.
The same themes continued to play out on Friday, although market analysts also included worries over the upcoming French elections as another driver for safe-haven demand for bonds. And because of the persistent demand for bonds, bond yields plunged once more while the yen happily gained strength to end the week strong.
The U.S. Dollar
The Greenback had a mixed performance while trading roughly sideways on Monday and Tuesday. The Greenback then got a bullish boost across the board due to Yellen’s first testimony. And practically all market analysts point to the following statements for the bullish reaction (emphasis mine):
“As I noted on previous occasions, waiting too long to remove accommodation would be unwise, potentially requiring the FOMC to eventually raise rates rapidly, which could risk disrupting financial markets and pushing the economy into recession.”
“Incoming data suggest that labor market conditions continue to strengthen and inflation is moving up to 2 percent, consistent with the Committee’s expectations. At our upcoming meetings, the Committee will evaluate whether employment and inflation are continuing to evolve in line with these expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
The very hawkish rhetoric was a welcome surprise, which caused rate hike expectations to rise, sending the Greenback higher in the process. By the way, Forex Gump has a detailed write-up on the key points from Fed Head Yellen’s prepared speech, as well as some of the highlights from the Q&A session.
Getting back on topic, the Greenback had a mixed performance after that as market players waited for a slew of U.S. economic reports to be released, namely the U.S. CPI and retail sales reports. And when they were released, the Greenback shot higher only to quickly double back and then continue sliding ever lower for most of the remainder of the week.
The reason for the slide is not clear, with some market analysts pointing to profit-taking after an 11-day Greenback rally. Other market analysts pointed to the scaling back of rate hike expectations after the Yellen-induced rate hike hysteria. And that does appear to be the case, since odds for a March rate hike slumped to 17.7% by Friday, according to the CME Group’s FedWatch Tool. And for reference, odds for a March rate hike surged to 31% on Wednesday after the net positive economic reports were released and after Yellen’s second round of testimonies.
Still, the later slide was not enough to completely erase the Greenback’s early gains, so the Greenback managed to end up a net winner this week.
The Australian Dollar
Price action on the Aussie was rather messy but roughly uniform. And there was also decent two-way action since the Aussie initially strengthened before weakening.
The Aussie started the new trading week by sliding lower on Monday. And the most likely reason for that was that commodities were in retreat on Monday, which likely weighed down on the comdoll.
The Aussie then got a bullish infusion when the National Australia Bank’s (NAB) monthly business survey for January was released. According to the survey, the business conditions index rose from 10 to 16 index points. This is around the same level as the readings before the global financial crisis when Australia had a mining boom.
The great improvement in business conditions also caused business sentiment to jump from 6 to 10 index points. And just as good as the reading for the employment index, since rose from 2 to 7 index points, which is the highest since 2011.
Moreover, the reading “points to an annual job creation rate of around 240k (around 20k per month).” And that probably fueled expectations that Australia’s jobs report would be a solid one.
Anyhow, China also released its positive CPI numbers about an hour after NAB’s monthly survey, which likely helped sustain the Aussie’s bullish momentum. However, linking price action to the available catalysts shows that it was NAB’s monthly business survey that triggered the Aussie rally.
Moving on, the Aussie then happily traded higher on Wednesday, thanks to the commodities rally at the time.
However, the Aussie rally ran out of steam on Thursday when Australia’s January jobs report was released. The headline readings were actually impressive, with the jobless rate ticking lower to 5.7% and employment printing a better-than-expected net increase of 13.5K.
However, the devil’s in the details, as the saying goes. And as Forex Gump pointed out in his Forex Preview, “market players tend to look at the full-time employment numbers and the participation rate.” And unfortunately (for Aussie bulls), full-time employment fell by 44.8K, which is the first loss of full-time jobs after three months of gain.
And while the number of unemployed people fell from 740K to 720K, the labor force participation rate also ticked lower from 64.7% to 64.6%, so the lower jobless rate was partially due to Australians getting discouraged and dropping out of the labor force, which is not good for the Australian economy.
Incidentally (well, not really), commodities also got routed on Thursday, and that also very likely helped pull down the Aussie.
And lingering disappointment over the jobs report, as well as another broad-based commodities rout, resulted in the Aussie trading mostly lower on Friday and ending the week as a net loser.
The New Zealand Dollar
The Kiwi’s price action was very similar to the Aussie, so commodities were also apparently a major driver for the Kiwi’s price action this week. The Kiwi’s price action tracked commodity price more closely, though.
Anyhow, the Kiwi also dipped on Monday when commodities were in retreat. It then traded roughly sideways on Tuesday when commodities were roughly flat. NZD/USD was a clear exception, though.
The Kiwi then got bid up on Wednesday when commodities were in rally mode. The Kiwi then had a mixed performance on Thursday, probably because forex traders were jittery ahead of New Zealand’s quarterly retail sales report. Commodities were slumping, though, so the Kiwi mostly showed weakness.
And as it turns out, the headline reading for New Zealand’s Q4 retail sales came in at +0.8% quarter-on-quarter while the core reading came in at +0.6%. Both are pretty decent readings.
However, both also missed the consensus readings of +1.1% and +0.9% respectively. As such, the Kiwi resumed tracking the slide in commodity prices on Friday to end the week also a net loser.
The Canadian Dollar
The Loonie’s price action looks messy at first, but as marked above, the Loonie actually showed some strength from Monday to Wednesday, even as oil weakened on Monday, thanks to yet another increase in the number of U.S. oil rigs and signs of higher U.S. oil production.
The Loonie’s strength was likely an extension of last week’s rally brought about by Canada’s positive jobs report. Although the “wonderful” meeting between Trump and Trudeau also probably raised optimism that Canada won’t be too hurt by Trump’s trade policies, which are viewed as protectionist in nature.
The Loonie’s price action began to diverge during the later part of Wednesday, though, which meant that opposing currencies now held sway on the price action of Loonie pairs.
There was no apparent reason for this. And oil couldn’t really provide any direction since it had been trading roughly sideways after Monday’s drop, likely because market players were mulling over the supply cut due to the OPEC deal and how rising U.S. oil rigs and signs of rising U.S. oil output would likely offset that.
The Swiss Franc
Price action on the Swissy was pretty messy (as usual). However, the Swissy staged a broad-based rally on Thursday, thanks to the plunge in bond yields and equities rout at the time, which are very clear signs of risk aversion. And it was this broad-based rally on Thursday that allowed the Swissy to end up as the net winner for the week.
I guess the SNB wasn’t in the mood to intervene in the forex market (*cough* currency manipulation *cough*) this week, huh?
After promising signs of uniform price action last week, the euro returned to its old habits, since the euro’s price action was a complete mess once, which means that opposing currencies were dictating the price action on euro pairs again.
Interestingly enough, opinionway’s daily polls on the upcoming French elections showed that the anti-EU Front National’s Marine Le Pain was slowly taking ground against her main rival for the second round of elections. However, that didn’t have the same impact it did as last week.