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?
Last week’s main themes continued to play out this week, so the euro is still the one currency to rule them, with the Greenback in second place.
The Kiwi, meanwhile, got another smack-down. So, what drove price action on these currencies? And how did the other currencies fare? Time to find out!
The euro reigns supreme once again. Interestingly enough, the euro had a mixed performance from Monday to Wednesday. Some euro pairs were even range-bound. That all changed come Thursday, though, thanks to the ECB’s press conference.
As for specifics, you can check out Forex Gump’s write-up for that here. The gist of it all, though, is that the ECB upgraded its growth and inflation outlook while saying that “risks of deflation have largely disappeared.”
And since these deflation risks were the ones that prompted the ECB to begin its QE program in the first place, ECB Overlord Draghi had this to say (emphasis mine):
“There is no longer that sense of urgency in taking further actions while maintaining the accommodative monetary policy stance including the forward guidance.”
And with regard to interest rates, the ECB’s forward guidance is that it “continues to expect the key ECB interest rates to remain at present or lower levels for an extended period of time, and well past the horizon of the net asset purchases.”
However, Draghi clarified that “the probability of an expectation that will actually materialize into lower level has gone down.” In simple English, Draghi is explicitly saying that the chance for a rate cut is now lower.
And all that not-as-dovish rhetoric was the perfect excuse for euro bulls to charge in, and so the euro began trading higher across the board. The euro later got a bullish infusion on Friday, and that was apparently linked to rumors that ECB officials talked about hiking rates before the ECB’s QE program finally ends.
Reuters later released a report (that cited unnamed sources as well) claiming that ECB officials did discuss rate hikes, “but that the discussion was brief, and there was no broad support for the idea.” Euro bulls didn’t seem to mind, though, since they continued to buy up the euro until before apparently taking some profits off the table near the end.
The U.S. Dollar
The Greenback came up short and had to content itself with the second place yet again. The Greenback was range-bound from Monday to Tuesday but was mostly higher against its peers. And market analysts attributed this soft demand for the Greenback to higher expectations for a March rate hike.
The Greenback then jolted higher across the board on Wednesday when the February ADP report printed a substantial 298K increase in non-farm jobs (184K expected, 261K previous). This apparently stoked heavy speculation that the February NFP report would also print stellar numbers, thereby cementing rate hike expectations.
Expectations that the NFP report would be awesome then allowed the Greenback to chug mostly higher on Thursday before starting to dip on Friday, several hours before the NFP report was to be released. There were no clear catalysts, but early profit-taking was the likely reason.
And when the NFP report finally got released, the reading for non-farm payrolls came in higher than consensus, but wage growth was slightly disappointing. And Greenback bulls who took preemptive positions ahead of the NFP report apparently used that as a pretext to start taking profits off the table. And profit-taking on the Greenback, plus the euro rally that was discussed earlier, is why the Greenback came up short and lost to the euro yet again.
By the way, just note that despite the Greenback’s bearish reaction, the NFP report was actually very solid overall. In fact, as Forex Gump pointed out in his review of the NFP report, which you can read here, odds for a March rate hike actually climbed higher from 88.6% to 93%.
Heck, odds for a second rate hike by June even jumped higher from 45.4% to 55.4%. So just keep that in mind for next week’s FOMC statement.
The New Zealand Dollar
The Kiwi was the worst-performing currency yet again. And the Kiwi showed weakness right from the get-go. And just like last week and the week before that, the Kiwi appears to be acting as an anti-dollar yet again.
And as noted earlier, the Greenback showed signs of strength on Monday and Tuesday, so the Kiwi showed signs of weakness. The Kiwi’s weakness then intensified on Wednesday when Greenback demand picked up because of the ADP report.
The ADP report then sustained rate hike expectations and Greenback demand on Thursday, so the Kiwi’s weakness was sustained as well. Finally, on Friday, the Greenback began weakening ahead of the NFP report and then weakened some more after the NFP report, so the Kiwi finally found some relief, although euro strength persisted, so EUR/NZD got slapped lower still.
And as you’ll see when we discuss the Aussie later, commodities also got gutted, and that also likely helped to pull down the Kiwi. After all, the Kiwi is also a comdoll.
The commodities route also helps to explain why AUD/NZD began trading sideways starting on Wednesday. U.S. dollar dynamics likely had more influence over the Kiwi’s price action, though, since the Kiwi was able to broadly recover on Friday when commodities (other than base metals) were mostly down.
The Pound Sterling
The pound had a bad run this week, losing out to everything except the pitiful Kiwi. And as marked in the chart above, the pound found trouble right from the very start.
And market analysts attributed this to Brexit-related jitters, since peers at the House of Lords were expected to issue a challenge against Theresa May’s government again by adding an amendment to give Parliament more say in the Brexit process.
And, well, the Lords were indeed successful in adding an amendment granting Parliament veto power over Theresa May’s Brexit deal. As such, the pound continued to bleed out. The pound’s bleeding finally stopped on Wednesday when Chancellor of the Exchequer Philip Hammond delivered his annual U.K. budget statement.
There were a lot of things discussed, but the following are some of the key points:
- Office of Budget Responsibility (OBR) upgraded its GDP forecast for this year from 1.6% to 2.0%.
- The upgrade supposedly reflects the recent strength in the British economy.
- However, economic growth is then expected to decelerate to 1.6% in 2018, before recovering by 1.7% in 2019, accelerating by 1.9% in 2020, and then back at 2.0% by 2021.
- Meanwhile, headline inflation is expected to come in at 2.4% for this year, 2.0% for 2018, and also 2.0% for 2019.
- Furthermore, “Public sector net borrowing as a percentage of GDP is predicted to fall from 3.8% last year to 2.6% this year.”
- And “From April this year, it [Corporation Tax] will fall to 19%, the lowest rate in the G20. In 2020 it will fall again to 17%.”
- As for the labor market, Hammond forecasted that “a further 2/3rds of a million people” are expected to be in work by 2021.
If you prefer an infographic for some of those details, then here.
— HM Treasury (@hmtreasury) March 8, 2017
Anyhow, the pound’s price action steadied after that before becoming more mixed on Friday.
The pound was never able to recover from its earlier losses, though, so it ended up as one of the biggest losers this week.
The Australian Dollar
As you can see in the chart above, the Aussie dollar initially showed strength before bulls called it quits and ran away.
Interestingly enough, there was actually a week-long commodities carnage going on during the week, as mentioned earlier and as you can see below.
Still, the Aussie initially resisted and even climbed broadly higher. And the initial Aussie rally was attributed to speculation that the RBA would sound upbeat during the RBA statement.
And as it turns out, the RBA did sound optimistic. Although it opted to maintain its current monetary policy.
Still, the RBA’s optimism was enough for the market to think that the RBA’s next move would be a rate hike. It also likely helped that the RBA refrained from talking down the Aussie’s recent strength. Forex Gump has more on what the RBA had to say, so read it here, if you want the details.
Moving on, Aussie bulls later waved the white flag of defeat on Wednesday, very likely because the commodities carnage was becoming unbearable.
For example, iron ore, Australia’s main commodity export, suffered the hardest weekly drop in four months during the week.
And this broad-based slump in commodity prices was being blamed by market analysts on signs of weakening demand from China, as well as signs of rising inventory levels, and the stronger Greenback.
Aussie pairs (with the exception of EUR/AUD) later staged a broad-based recovery on Friday. Commodities were still broadly down, but base metals were able to recover, very likely because of the Greenback’s weakness and short covering.
Although some market analysts also say that worries over the persistent glut and weaker demand from China somehow eased a bit. Still, the damage was already done, and so the Aussie ended up being one of the weakest currencies this week.
The Japanese Yen
As usual, yen pairs were tracking bond yields for the most part, U.S. bonds yields in particular. However, safe-haven demand for the yen was also likely in play, at least on Monday and Tuesday.
As you can see below, bond yields rose non-stop before finally dipping on Friday.
Bond yields rose on Monday and Tuesday, thanks to higher rate hike expectations, market analysts say. However, risk aversion plagued global equities at the time because of Trump’s tweet, which caused pharmaceuticals to slide.
Risk aversion naturally means safe-haven demand for the yen. However, bond yields were on the rise, which means a weaker yen. And these two conflicting signals are likely the reasons why the yen had a mixed performance while essentially range-bound from Monday to Tuesday.
Risk aversion persisted on Wednesday. However, the ADP report caused bond yields to surge, market analysts say.
And this time, yen bulls said “we give up” and so the yen finally began to track bond yields again, weakening further when bond yields rose further on Thursday, before recovering when bond yields dipped on Friday. And the slide in bond yields on Friday was being blamed by market analysts on the weaker-than-expected U.S. wage growth, which apparently does not make a strong case for higher inflation.
Anyhow, the yen’s early resistance to rising bond yields, as well as opposing currency price action, were the reasons why the yen had a mixed performance for the week.
The Swiss Franc
The Swissy was initially mixed, but mostly weaker on Monday and Tuesday. There were no clear catalysts for this, since risk aversion was already showing dominance. However, it was revealed on Monday that sight deposits at the SNB jumped from CHF 548,167 million to CHF 553,364 million.
Meanwhile, the SNB revealed on Tuesday that its foreign currency reserves rose from CHF 643.94 billion to CHF 668.18 billion. These two pieces of information very heavily implies that the sneaky SNB was intervening in the forex market again (*cough* currency manipulation *cough*) in order to weaken the Swissy. And that probably spooked Swissy bulls and convinced them to take their profits and run.
Risk aversion persisted, though, and that very likely enticed fresh Swissy bulls to come in, as well as fueled safe-haven demand for Swissy. Although the Swissy also probably got lucky and exploited the weakness of the other currencies, namely the comdolls, the pound, and the yen.
The Canadian Dollar
Oil plunged very hard (chart for oil is inverted) this week, thanks to renewed worries over an oil glut amid rising U.S. oil rigs and oil output and wavering faith in the effectiveness of OPEC’s oil cut deal, market analysts say. Interestingly enough, the Loonie was able to resist, and even managed to end up a net winner for the week.
And looking at the Loonie’s price action, we can see that it’s a complete mess. This therefore implies that opposing currencies dominated the price action of Loonie pairs. And since the other comdolls, the yen, and the pound, were on the back foot this week, the Loonie just got lucky and ended up a net winner.
Well, to be fair to the Loonie, it did get bought up across the board on Friday when Canada released a very solid jobs report, printing a net increase of 15.3K jobs in February.
Even better, the net increase was due to a massive 105K increase in full-time jobs, which was partially offset by a not-as-massive 89.8K decrease in part-time jobs. Even so, the Loonie had nothing on the mighty euro, since EUR/CAD just shrugged off Canada’s very strong jobs report.