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?
With all that hoopla about the Greenback, some of you probably thought that the Greenback was this week’s main winner. Nope! This week’s champ is clearly the euro. Also, did you know that the Kiwi got whupped this week? So, what drove price action on these currencies? And how did the other currencies fare this week? Well, time to find out!
Like a phoenix reborn, the euro became this week’s main winner after getting clobbered pretty hard last week.
The euro benefited a lot from the weakness of some currencies, namely the Loonie, the yen, and especially the Kiwi, which we’ll be discussing later. But as you can see in the chart above, the euro got broad-based bullish infusions on Monday and Friday. And these were enough to allow the euro to win out against its forex rivals, including the mighty Greenback.
The broad-based euro rally on Monday was attributed to polls released during the weekend, which showed that the anti-EU Front National’s Marine Le Pen was losing ground to Emmanuel Macron in the second round of the race for the French presidency. Specifically, Odoxa’s poll results came in at 61-39 in favor of Macron while a poll by Figaro/LCI came in at 58-42, also in favor of Macron.
However, both polls showed that Le Pen still leads in the first round of the elections with 27%, while Macron was in second place, with 25% of the votes.
Macron, a former investment banker and economy minister, is staunchly pro-EU, and is now the favored candidate for maintaining the status quo after Francois Fillon lost favorability because of certain scandalous allegations against him.
Moving on, the euro got another broad-based bullish push on Friday, thanks to yet another poll from Odoxa. This time, Odoxa’s poll shows that Le Pen finally lost the lead in the first round of the French elections, with 27% for Macron and 25.5% for Le Pen. This is the first time that Le Pen got pushed back into second place, which surprised the market.
More importantly, Odoxa’s poll results also showed that there’s a chance that Le Pen may be eliminated from the race if Fillon drops out and is replaced by Alain Juppe. If Juppe joins the fray, then he would garner 26.5% of the votes in the first round of the elections while Macron and Le Pen would get 25% and 24% respectively. This would make Juppe the leader of the pack, with Macron coming in second place, effectively blocking Le Pen from the second round of the elections. And euro bulls obviously liked this a lot.
The U.S. Dollar
The Greenback was the second strongest currency of the week. And I’m pretty sure most of you already know what drove the Greenback higher this week, given all the hubbub about the Greenback. But if you somehow missed it or you’re a long-term trader or technicals-based trader who only checks up on the fundies driving price action during the weekend, then read up.
The Greenback had a steady start before dipping ahead of Trump’s speech for most of Tuesday. However, the Greenback began getting a lot of buyers during the late U.S. session, thanks to a barrage of hawkish comments from Fed officials.
As for specifics, New York Fed President William Dudley’s said that “the case for monetary policy tightening has become a lot more compelling.” Meanwhile, Philadelphia Fed President Patrick Harker said that he thinks “three hikes as appropriate for 2017, assuming things stay on track.” San Francisco Fed President John Williams also chimed in, saying that “a rate increase is very much on the table for serious consideration at our March meeting.”
Pretty hawkish yeah? In fact, odds for a March rate hike came within licking distance of 80% before gradually settling down at 62.0%, according to the CME Group’s FedWatch Tool. By the way, if you don’t know what that tool is about, but wanna know more, you can check out Forex Gump’s primer for that here.
Where was I? Oh, right. Odds for a March rate hike got crushed from 62.0% to 35.4% after Trump spoke, though, likely because he failed to provide any details on his fiscal stimulus plans. And as a result, the Greenback tumbled a bit. Still, Trump did say that he will soon be asking Congress to approve a trillion dollar infrastructure program. And prospects for faster U.S. economic growth apparently attracted enough Greenback bulls to limit the Greenback’s losses and even send the Greenback higher still. By the way, if you wanna know more about what Trump had to say, you can check out Forex Gump’s write-up here.
Rate hike expectations got reignited later on Wednesday, thanks to U.S. Fed Governor Lael Brainard’s speech. In her speech, Brainard communicated that “it will likely be appropriate soon to remove additional accommodation, continuing on a gradual path.” Brainard was one of the most dovish voting FOMC members last year and she has historically been very cautious when she delivers a hawkish message, so her very noticeably hawkish statement had extra heft to it, sending the Greenback higher, as odds for a March rate hike surged to 66.4%.
Given that cautious Brainard was openly showing her hawkish feathers, speculation ramped up on Thursday that Yellen may sound hawkish on Friday as well, and so rate hike odds (and the Greenback) steadily climbed higher without any major catalysts.
And thanks to all that speculation, odds for a March rate hike already stood at a lofty 77.5% before Yellen’s speech.
And when Yellen did speak on Friday, she said these magic words (emphasis mine):
“Indeed, at our meeting later this month, the Committee will evaluate whether employment and inflation are continuing to evolve in line with our expectations, in which case a further adjustment of the federal funds rate would likely be appropriate.”
In simpler terms, the March FOMC meeting should be considered “live” for a possible rate hike. Can’t get more hawkish than that, well, except maybe saying that they will definitely hike, I guess. Anyhow, the market already expected a hawkish statement from Yellen, so rate hike odds only improved a bit from 77.5% to 79.7%. The Greenback, meanwhile, had a mixed performance but was mostly weaker, likely because of profit-taking to avoid weekend risk.
By the way all Fed officials gave their usual caveats. Yellen, for example, said that a March rate hike would only be “appropriate” if jobs and inflation data evolve within expectations. So make sure to keep an eye on the Greenback next week, since we’ve got another NFP Friday coming up, and that could either cement or kill March rate hike expectations.
The New Zealand Dollar
The Kiwi got thoroughly thrashed this week. Interestingly enough, the Kiwi barely reacted to economic reports that were thrown its way. Kiwi pairs were range-bound on Monday, for example, even though New Zealand’s trade deficit widened in January.
But as I noted last week, Kiwi pairs were back to their anti-dollar antics. And that was apparently the case this week as well. Regular readers should be familiar with this by now, since I mention it every once in a while. But to the newbies out there, the Kiwi’s anti-dollar price action is due to the following:
- As of last year, the trade turnover on the Kiwi is roughly around U.S. $105 billion per day
- Most of the trades occur offshore with NZD/USD in focus, according to RBNZ Guv’nah Wheeler himself during the August 2016 RBNZ presser.
- According to the November 2016 RBNZ statement and presser, the RBNZ expects the Kiwi to weaken, “reflecting an improvement in global economic conditions and a narrowing of interest rate differentials between New Zealand and other advanced economies.”
- Wheeler reiterated this in the February 2017 RBNZ statement and presser.
- This “narrowing of interest rate differentials“ mainly means a Fed rate hike, with the rationale being that a Fed rate hike (or hikes) would pull investors away from New Zealand while enticing more investors to go to the U.S., causing NZD/USD to tank, which would then pull down the other Kiwi pairs.
With that out of the way, the Kiwi’s downfall began during Tuesday’s U.S. session. And as we discussed earlier, the Greenback was in demand at the time because of hawkish rhetoric from several Fed officials, which caused rate hike odds to surge. Higher odds for a March rate hike means narrower interest rate differentials sooner, which weakened the Kiwi.
Trump’s speech weakened rate hike expectations but the Kiwi weakened further instead of recovering, likely because Trump’s fiscal stimulus plans would accelerate economic growth in the U.S., which would make investing in the U.S. more attractive compared to New Zealand. Also, faster economic growth may prompt the Fed to hike sooner or later in order to prevent overheating the economy, so interest rate differentials were still indirectly in play.
After that, Brainard said her hawkish speech, which caused rate hike odds to initially surge then steadily improve ahead of Yellen’s speech. And so the Kiwi also steadily bled out, as a result, before getting some relief near the very end when profit-taking by Greenback bulls on Yellen’s speech finally eased bearish pressure on the Kiwi.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Canadian Dollar
The Loonie was the second weakest currency this week. And as you can see in the chart above, the Loonie showed weakness right from the start, as Loonie pairs apparently tracked the early slide oil prices (line chart for oil is inverted). And oil’s slide was blamed by market analysts on concerns that rising U.S. oil output would overwhelm the positive effects from OPEC’s oil cut deal.
Oil regained some poise late on Tuesday, thanks to reports that Russia slashed its oil output further and that oil producers were complying with their obligations pursuant to the OPEC oil cut deal. However, Loonie pairs didn’t follow suit. In fact, the Loonie even extended its losses in some Loonie pairs.
This wonky price action likely means that forex traders were also betting that the BOC would maintain its dovish tone during the BOC statement. And that’s exactly what the BOC did, when it downplayed the recent positive developments in exports, inflation, and the labor market. The Loonie got a sharp bearish slap from the BOC decision, but price action on Loonie pairs became more mixed after that, which implies that opposing currencies were now dominating price action on Loonie pairs. No clear reason why, though, and oil prices continued to weaken, thanks to U.S. oil inventories printing an increase of 1.5 million barrels, which puts U.S. oil inventories at an all-time high of 520.2 million barrels. Still, the Loonie’s earlier losses did enough damage to ensure that the Loonie ended up being the second weakest currency of the week.
The Australian Dollar
The Aussie traded mostly sideways from Monday to Tuesday. It then got a bullish boost across the board when Australia avoided a technical recession by printing a 1.1% quarter-on-quarter rate of expansion in Q4 2016.
The Aussie later wobbled a bit when Trump gave his speech, but Trump’s trillion dollar infrastructure program caused commodities to rally, base metals were particularly in high demand. As a result, demand for the Aussie got reinvigorated, although AUD/USD got left behind because demand for the Greenback was stronger.
The Aussie’s luck finally ran out come Thursday, thanks to a double kick from the drastic narrowing in Australia’s trade surplus ($1.30B vs. $3.82B expected, $3.33B previous), which is a bad start for Q1 2017, as well as retreating commodity prices, which was being attributed to the stronger Greenback and profit-taking after the Trump-induced rally.
Finally, the Aussie’s price action became mixed on Friday. And this mixed price action, plus the two-way price action earlier, is the reason why the Aussie had a mixed performance this week. By the way, the RBA monetary policy decision and statement is next week, so keep an eye on the Aussie.
The Japanese Yen
As usual, yen pairs were tracking bond yields, particularly U.S. bonds yields. And since U.S. bond yields climbed higher for the week, the yen quite naturally ended up being a net loser for the week.
Bond yields rose on Monday, thanks to optimism that Trump will say something positive, market analysts say. Bond yields dipped ahead of Trump’s speech on Tuesday, which market analysts blamed on month-end flows, as hedge funds and other large players rebalanced their portfolios. Bond yields then surged on Wednesday and Thursday, thanks to higher expectations for a March rate hike, before flattening out on Friday, with the yen’s price action also flattening out for the most part.
The Swiss Franc
The Swissy’s price action looks like a mess at first, but if you remove USD/CHF’s price action, you get this.
Looking at that, it’s pretty obvious that Swissy pairs were trending lower, which means that the Swissy was winning out against its rivals. Although price action did become a mess near the end.
So, why was the Swissy steadily in demand for most of the week? Well, market analysts attributed that to safe-haven demand for the Swissy. And this safe-haven demand was being fueled by worries about problems in Greece and political jitters in Europe, particularly the upcoming French elections. Although SNB Overlord Thomas Jordan also included elections in Germany, the potential banking crisis in Italy, Brexit, and worries over Trump’s trade policies as drivers for the Swissy’s strength, which is giving the SNB a headache.
The Pound Sterling
After several weeks of being at the very top or at the very bottom, the pound finally had a mixed performance this week. This means that opposing currencies were the ones that were dictating the price action of pound pairs for the most part. And you can also see that the pound’s price action was a bit mixed.
There were top-tier economic reports for the U.K., namely the PMI reports, but they were all pretty much duds, with the exception of the services PMI report. But even then, the services PMI report didn’t actually have a lot of sticking power.
The pound was a net loser, though, and that was due to Brexit-related jitters. As for specifics, the pound dropped across the board about two hours after the U.K.’s manufacturing PMI report was released. As I noted in my recap for Wednesday’s morning London session, this was likely due to reports that were circulating at the time that peers at the House of Lords plan to go against Theresa May’s government by adding an amendment that would protect the rights of E.U. citizens. However, if the Brexit Bill is passed back to the House of Commons, the MPs there may decide to reject the amendments, thereby setting up the possibility of a so-called political “ping pong” between the House of Lords and House of Commons, which will likely raise Brexit-related uncertainty and possibly delay the Brexit process.
As it turns out, peers at the House of Lords did exactly that. Instead of dropping further, however, the pound actually found support, with some pound pairs actually taking advantage of the weakness of their opposing currencies and climbing higher. A sell the rumor, buy the news likely played out. However, it’s also highly likely that the pound found actual buyers, because Theresa May said that her Brexit timetable “remains unchanged” and Baroness Smith, Labour Party Leader at the House of Lords, also said that if their amendments are overturned, they likely wouldn’t fight for a second vote, which means that a political “ping pong” will probably be avoided, and this very likely eased Brexit-related jitters a bit.
After that, the pound’s price action became a mess.
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!