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 yen domination was the main theme this week. Aside from that, broad-based euro weakness was also a major theme.
So, what was driving forex price action on these currencies? And how did the other currencies perform this week?
The Japanese Yen
The yen ended up being the one currency to rule them all yet again. And as usual, yen pairs were tracking bond yields, particularly U.S. bond yields. And as you can see below, U.S. bond yields plunged hard for the week, starting on Wednesday. What’s that all about?
Well, Wednesday’s drop was blamed by market analysts on the FOMC meeting minutes. We’ll talk more about that when we discuss the Greenback later.
Moving on, Thursday’s bond yield plunge was attributed by market analysts to growing doubts over Trump’s fiscal stimulus plans.
As for Friday’s very hard slump, that was blamed by market analysts on jitters over political uncertainty in Europe, particularly with regard to the French presidential elections.
The euro is the worst-performing currency of this trading week. And as marked on the chart above, the euro suffered the bulk of its losses on Tuesday and Wednesday. What happened then?
Well, economic reports for the Euro Zone that were released on those days were actually pretty good. Markit’s February PMI readings for the whole Euro Zone, for example, were all at multi-year highs.
- Flash Eurozone PMI Composite Index at 56.0 (54.4 previous). 70-month high.
- Flash Eurozone Services PMI at 55.6 (53.7 previous). 69-month high.
- Flash Eurozone Manufacturing PMI at 55.5 (55.2 previous). 70-month high.
The strong PMI numbers did not have had a positive effect on the euro. However, market analysts point out that the PMI readings did have a positive effect on both the European and U.S. equities market. And the risk-on vibes at the time were very likely the reason for the euro’s weakness.
Oh, FYI for the newbies out there, low borrowing costs in the Euro Zone have made the euro a major funding currency, which just means that market players borrow in euros to fund trades in riskier or higher-yielding assets/instruments.
As such, the euro kinda acts like a safe-haven, even though it is not. One can’t really call it a safe-haven if there are an ongoing debt crisis and banking problems there.
Getting back on topic, market analysts also point to political uncertainty in Europe as another reason for the euro’s weakness, particularly worries related to the French presidential elections.
And it does appear that political uncertainty was a factor in the euro’s weakness since the euro jumped across the board late on Wednesday when Francois Bayrou announced an alliance with Emmanuel Macron, which was seen as improving the odds of denying Marine Le Pen’s bid for the French presidency. For those who don’t follow French politics much, Marine Le Pen is the anti-EU Front National’s contender for the French presidency.
Moving on, the euro’s price action became pretty mixed after the broad-based jump on Wednesday. Still, the damage was already done, and so the euro ended up as the biggest loser this week.
Interestingly enough, global equity indices were in retreat, but the euro’s price action was mixed instead of showing further strength. And this was probably because persistent political uncertainty in Europe was also cited as one of the reasons for the risk-off vibes, as mentioned earlier when we discussed the yen.
The Swiss Franc
Wow! Just wow! Amazingly enough, the Swissy actually showed uniform price action for most of the week. For the past few months, price action on the Swissy would either be a complete mess, or there would only be uniform price action on a day or two (at best).
This week, however, the Swissy had a steady start, then weakened across the board from Tuesday until Wednesday, before having a very mixed Thursday, and then broadly recovering on Friday.
And apparently, the Swissy’s price action during the week was linked to risk sentiment, since risk-taking prevailed early on, which means less demand for the safe-haven Swissy. However, risk sentiment was beginning to sour just before Wednesday’s U.S. session rolled around.
And after that, it was risk aversion all the way, so more demand for the safe-haven Swissy. The Swissy wasn’t able to recover from the early rout, though, so it closed out the week as the second worst-performing currency after the euro.
The Pound Sterling
After last week’s poor performance, the pound regained some poise this week and even ended up as this week’s second-strongest currency after the yen.
Interestingly enough, almost all pound pairs showed strength right from the get-go, even though there were no apparent market analysts.
Market analysts attributed this wonky price action to weaker bearish pressure from Brexit-related jitters since market players were more focused on Trump-related uncertainty in the U.S. and political uncertainty in continental Europe.
The pound then tumbled a bit on Wednesday, when the second estimate for the U.K.’s Q4 GDP growth was released, and it was revealed that business investment contracted by 1.0% quarter-on-quarter.
This is the first contraction in five quarters and was a severe disappointment for forex traders since the consensus was that business investment would be steady. Year-on-year, business investment contracted by 0.9%, which is softer than the previous quarter’s 2.2% slump, but the opposite of the expected 0.2% increase.
Moreover, Q4’s slide marks the fourth consecutive quarter of declines in business investment and is also one of the major reasons why the year-on-year reading was downgraded from +2.2% to +2.0%.
Despite the very disappointing business investment component of the GDP report, there was no follow-through selling. In fact, the pound later shot up on Thursday after trading sideways for a bit. There was no apparent reason for the pound’s strength, but uncertainty elsewhere reducing bearish pressure on the pound was once again being cited, although technicals were also thrown into the mix.
And finally, the pound steadied during the first half of Friday before getting dumped during the latter half. Other than profit-taking to avoid weekend risk after a good run this week, market analysts only noted the broad-based pound selloff, but could not pinpoint the reason for the sell-off.
The U.S. Dollar
The Greenback had a mixed performance for the week. But as you can see on the chart above, Greenback pairs actually had uniform yet two-way price action.
The Greenback showed broad-based strength on Monday and Tuesday, thanks to hawkish rhetoric from a couple of Fed officials, namely Cleveland Fed President Loretta Mester and Philadelphia Fed President Patrick Harker.
After that, the Greenback had a mixed performance on Wednesday but was still showing strength for the most part, as forex traders waited for the minutes of the February FOMC meeting to be released.
And when the FOMC meeting minutes finally got released, the Greenback got dumped. Forex Gump already has a detailed write-up on that, so read it here. The gist of it all, though, is that while the minutes revealed that “many” Fed officials think that it might be “appropriate to raise the federal funds rate again fairly soon,” “several” Fed officials were also “concerned about the downside risks to economic activity associated with the possibility of additional appreciation of the foreign exchange value of the dollar.” Moreover, ”several” Fed officials also think that a stronger dollar would pose “downside risks to the inflation outlook.”
With regard to fiscal policy Fed officials also “cautioned against adjusting monetary policy in anticipation of policy proposals that might not be enacted or that, if enacted, might turn out to have different consequences for economic activity and inflation than currently anticipated.”
This heavily implies that the Fed may be unwilling to move until The Donald finally provides the specifics of his fiscal stimulus plans.
The release of the FOMC meeting minutes was apparently the main trigger for the Greenback’s slide. However, market analysts also pointed to fading optimism over Trump’s fiscal stimulus plans, particularly Trump’s tax plans, after U.S. Treasury Secretary Steven Mnuchin refrained from divulging details of the said tax plan during a Wednesday interview with
The Wall Street Journal, as subsequent interviews with CNBC and the FOX Business Network on Thursday.
Moreover, Mnuchin also asked the following question during the CNBC interview:
“There have been a lot of questions about what the timing would be on this. Do you expect that the tax reforms would be retroactive to take place in January of this year, or do you expect this is something that we would look for next year at the earliest?”
And Mnuchin answered as follows:
“Regardless of when they [the tax reforms] go in place, this won’t really impact the economy until next year when you begin to see changes in behavior. And it will take a couple of years to get growth.”
Mnuchin would later reiterate that point during the FOX interview. Pretty intuitive, if you ask me. After all, the effects of Trump’s tax plans would take a while to materialize, assuming the tax reforms are passed by August as planned. However, some market analysts pointed specifically to those statements as being the reason for the Greenback’s sustained slide.
The Australian Dollar
The prevalence of risk aversion, the commodities slide, and bad data was not able to stop the Aussie from ending up as the third best-performing currency of the week.
The Aussie actually had a steady start but was able to score early victories against the safe-havens and the lower-yielding euro, so the early risk-on vibes apparently helped out the higher-yielding Aussie.
The Aussie’s advance halted late on Wednesday and even looked like it was about to reverse when the Australian Bureau of Statistics showed that private capital expenditure slumped by 2.1% quarter-on-quarter in Q4 2016.
This is a much harder drop than the expected 0.5% tumble. Moreover, Q4’s decline marks the fourth consecutive quarter of contraction in business investment.
Despite the poorer-than-expected readings for business investment, the risk-off vibes, and commodities rout (particularly of base metals) the Aussie tried to continue its rally later during the day.
However, the risk-off vibes didn’t go away. In fact, the risk-off vibes intensified come Friday. And that appeared to finally take its toll on the Aussie since the Aussie’s strength finally began to falter. The Aussie was able to hold onto some of its gains across most Aussie pairs, though, so the Aussie was still a net winner for the week.
The New Zealand Dollar
There weren’t really any major economic reports for New Zealand and the Kiwi just shrugged off the poor results for the latest dairy auction, as well as the broad-based commodities slide, to close out the week as a net winner.
The Kiwi did act kinda like an anti-dollar, though, so U.S. dollar dynamics were apparently in play again.
Anyhow, the Kiwi had a steady start before weakening across the board despite the risk-on vibes on Tuesday. And as discussed earlier, this is when the Greenback advanced against its forex rivals, thanks to hawkish rhetoric from Fed officials.
The risk-on vibes carried over into Wednesday, though, so the Kiwi was able to fight back a bit. And when the Greenback’s strength finally gave out when the FOMC meeting minutes got released, the Kiwi took advantage of that by climbing even higher on Thursday, despite the prevalence of risk aversion.
The persistent risk aversion finally took its toll on the Kiwi on Friday, though, since the Kiwi stabilized a bit before dipping during Friday’s morning London session. After that, the Kiwi’s price action diverged a bit, but its earlier climb meant that it was a net winner for the week.
The Canadian Dollar
The Loonie apparently took over the euro and Swissy’s role, since the Loonie’s price action was a complete mess this week, which indicates that opposing currencies were dictating price action on Loonie pairs.
And it certainly didn’t help that oil benchmarks were also range-bound for the week.
Hopefully, we’ll get some directional movement from the Loonie next week. The BOC monetary policy statement is coming up after all.