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?
Well, everybody probably already knows that the Greenback got whupped this week and why it got whupped. But did you know that the Aussie was this week’s top winner? What drove the Aussie higher? And how about the other currencies? How did they fare? Well, time to find out!
The U.S. Dollar
The Greenback got the stuffing beaten out of it this week. And the clear source of the Greenback’s misfortune this week was the FOMC monetary policy statement and presser. As always, Forex Gump has the details, so check out his write-up here.
The short version of it, though, is that the Fed’s media blitzkrieg and a string of positive economic reports overhyped the market to such an extent that a March rate hike was already factored in while odds for a follow-up rate hike by June began to rise. In other words, the market was expecting the Fed to upgrade its projections for the Fed Funds Rate to show a faster pace of tightening.
As it turns out, the Fed did hike. However, the Fed’s projections for the Fed Funds Rate, as well as the Fed’s economic forecasts, were all essentially unchanged. And this apparently broke the hearts of many rate hike junkies who reacted by dumping the Greenback very hard across the board.
Some market analysts are also making a big deal about the vote to hike not being unanimous, thanks to Kashkari’s dissent. However, as Forex Gump noted in his roundup of recent Fed statements, Kashkari has already signaled his dovish bias before the March rate hike, so that’s not really very surprising.
The Australian Dollar
The Aussie dollar is king of pips (or queen, if you like) this week. And the Aussie’s price action was apparently driven by rallying commodities for the most part. As to what drove commodities higher, market analysts pinned that on the Greenback’s price action. And since the Greenback got whupped hard this week, globally-traded commodities became relatively cheaper, making them more attractive to buyers.
Anyhow, the Aussie was mostly higher on Monday when commodities were slightly higher. The Aussie then dipped on Tuesday when commodities were also on the back foot. And when commodities rallied pretty hard on Wednesday, so did the Aussie. Thursday was a bit different because commodities continued to rally but the Aussie was mostly down for the day. And that was apparently due to Australia’s disappointing February jobs report, which showed that Australia suffered a net loss of 6.4K jobs (+16.3K expected), with the jobless rate climbing higher to 5.9% (steady at 5.7% expected) to boot.
Australia’s disappointing jobs report didn’t have a lot of sticking power, though, since the Aussie resumed tracking commodity prices higher on Friday.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The euro’s price action was kinda complicated, since there were a lot of factors competing for the driver’s seat throughout the week.
With that said, the euro was broadly weaker from Monday to Tuesday, thanks to jitters ahead of the Dutch elections and dovish rhetoric from ECB officials, according to market analysts. And one of the most commonly cited ECB official is ECB Governing Council Member Jan Smets who said, according to a Wall Street Journal piece, that the ECB has not yet started removing stimulus. Smets also reportedly rejected the market’s hawkish interpretation of last week’s ECB statement.
Moving on, the euro’s price action diverged on Wednesday, especially in the wake of the FOMC statement, which shows that opposing currencies dominated euro pairs. The euro’s price action was still a bit mixed come Thursday, but the overall bleeding has stopped, apparently because the anti-EU Geert Wilders lost out in the Dutch elections. The euro did get a bullish boost across the board later on, thanks to ECB Governing Council Member Ewald Nowotny’s hawkish comment that: “The structure of the interest rates does not always need to remain constant. The ECB could also raise the deposit rate earlier than the prime rate.” This goes against the ECB’s forward guidance that “the key ECB interest rates [are] to remain at present or lower levels for an extended period of time.” Nowotny’s comments also appear to support the hawkish rumors that I mentioned in last week’s write-up.
The rally was short lived, though, possibly because market players remembered that there was no broad support for such an idea among ECB officials, as noted in a Reuters report. A more likely reason is that the market was turning its gaze towards the French presidential elections. And this can be seen when the euro got rushed by sellers when opinionway’s latest daily poll showed that anti-EU Marine Le Pen widened her lead in the first round of the French presidential elections, with 28% after holding steady at 27% since Monday. Macron, Le Pen’s closest rival, has 25%. For the second round of the elections, Le Pen is still losing out to Macron. However, Macron’s lead has been narrowing, with voting intentions now at 59-41 in favor of Macron (60-40 previous).
The Pound Sterling
The pound had a good run this week, although the ride wasn’t exactly a smooth one. Anyhow, the pound started the week on a strong footing, thanks to expectations and later confirmation that MPs at the House of Commons would scrap the amendments introduced by peers at the House of Lords. And since the Lords, through a 274-118 vote, refused to challenge the decisions at the Commons, the Brexit Bill got passed on Monday and later became law when it received the Queen’s Royal Assent later on Thursday.
Going back to Monday, Nicola Sturgeon, Scotland’s First Minister also announced on that day that she would be asking the Scottish Parliament to perform the necessary processes in order to call for another Scottish referendum. However, the pound just shrugged that off. And market analysts attributed that to relief that a Scottish referendum won’t be happening anytime soon, since Sturgeon did say that: “the vote must take place within a timeframe to allow an informed choice to be made – when the terms of Brexit are clear but before the UK leaves the European Union, or shortly afterwards.“
Moving on, the pound dipped on Tuesday, probably on profit-taking ahead of the U.K. jobs report and the BOE statement. Although some market analysts also point to renewed Brexit-related worries.
After that, the pound recovered a bit then steadied before getting a broad-based bullish infusion about an hour before Wednesday’s morning London session rolled around. There was no apparent reason for this weird spike, although some market analysts tried to pin that on unconfirmed rumors that Sturgeon would abandon her crusade to call for a Scottish independence referendum. However, that’s very highly unlikely since those rumors already made the rounds about 6-7 hours before the spike.
There was an interesting Reuters report, though, which cited its own analysis and a study by the Wall Street Journal. And according to this Reuters report, the pound has a strange pattern of moving ahead of major economic reports, which may be due to leaks. In fact, Treasury Select Committee Chair Andrew Tyrie even urged the Financial Conduct Authority to investigate these signs of leaks.
And as it turns out, the U.K.’s jobs report was due for release a few hours after the spike occurred and it just so happens that the jobs report was pretty good for the most part. Whether or not the spike was due to preemptive positioning because of a leaked jobs report, I leave to you.
Going back to the jobs report, it was pretty good, as mentioned earlier. However, wage growth was rather disappointing, especially in real terms (inflation is taken into account), since real average weekly earnings (including bonuses) fell by 0.2% year-on-year in January (+0.3% previous), which is the first negative reading since August 2014. This means that the purchasing power of the average Brit suddenly contracted, which will likely hurt consumer spending and GDP growth somewhere down the road.
Moving right along, the pound had a mixed reaction to the FOMC statement, but began to uniformly weaken ahead of the BOE statement. And as expected, the BOE maintained its current monetary policy. What’s not expected, however, is that Kristin Forbes would vote for a rate hike. The other MPC members, meanwhile, noted that there were still downside risks, especially with regard to a Brexit deal, and consumer spending will likely continue to suffer. Nonetheless, “the Committee could respond if necessary.”
Not only that, “some” MPC members even “noted that it would take relatively little further upside news on the prospects for activity or inflation for them to consider that a more immediate reduction in policy support might be warranted,” given that “inflation [is] rising sharply, and only mixed evidence on slowing activity domestically.”
Pretty hawkish, yeah? Well, that’s what the market though so, too. And so the pound surged and then spend the rest of the week by steadily climbing higher still.
The Japanese Yen
Risk appetite was the dominant sentiment this week, but the safe-haven yen just shrugged that off, since yen pairs were (as usual) tracking bond yields for the most part, with U.S. bonds yields in focus. And since bond yields plunged during the week, the yen naturally got bid higher.
Bond yields rose on Monday thanks to bond selling ahead of the FOMC statement and expectations that corporations would be selling new bonds, market analysts say. As such, most yen pairs printed losses for the day. No problem, though, since bond yields fell on Tuesday, which market analysts blamed on profit-taking. Bond yields then plunged very hard on Wednesday, thanks to the FOMC statement. Most yen pairs continued to gain strength, but interestingly enough, only USD/JPY tracked the plunge in bond yields closely while the other yen pairs were more hesitant to do so. And this was probably due to the close proximity of the BOJ statement.
Speaking of the BOJ statement, that was a dud since the BOJ announced that it was maintaining its so-called “QQE With Yield Curve Control” framework wherein the BOJ targets the yields of 10-year JGBs and tries to keep them around 0%. BOJ Shogun Kuroda’s press conference also didn’t yield anything that’s really market-moving.
Incidentally, yen pairs have been closely tracking bond yields closely since around November of last year, when U.S. bond yields soared in the wake of Trump’s victory in the race to the White House, dragging global bond yields higher. The surge in global bond yields placed the BOJ’s so-called “QQE With Yield Curve Control” framework under the spotlight, since the the BOJ would have to buy up JGBs in order to keep yields at around 0%. And bond purchases, of course, means printing more yen. Not only that, keeping yields at around 0% would dissuade both local and foreign investors from loading up on JGBs and look for higher yields elsewhere, thereby lowering demand for the yen.
Anyhow, the BOJ statement was a dud, but it apparently made yen traders pause for a while, since yen pairs traded mostly sideways after that, even as bond yields recovered for a bit, which market analysts attributed to profit-taking after uncertainty eased a bit when Geert Wilders lost in the Dutch elections, as well as views that the reaction to the FOMC statement is apparently overdone.
Yen traders finally shrugged off the BOJ statement and began to look at bond yields again come Friday, since the yen strengthened across the board when bond yields fell on Friday. And market analysts attributed the drop in bond yields to the University of Michigan printing a dip in U.S. inflation expectations, as well as renewed jitters in Europe, courtesy of the poll results that we already talked about when we discussed the euro, which stoked demand for bonds.
The New Zealand Dollar
After several weeks of being an anti-dollar, the Kiwi’s price action finally showed some independence this week. And interestingly enough, the price action on Kiwi pairs kinda resembles the price action on Aussie pairs, so the commodities rally likely fueled demand for the Kiwi. And like the Aussie, the Kiwi also suffered a setback on Thursday. The Kiwi took a much harder hit, though. And you can clearly see this in AUD/NZD’s price action. And the reason why the Kiwi suffered more is that Australia only had a disappointing jobs report while the Kiwi had to contend with a disappointing Q4 2016 GDP report.
According to the GDP report, New Zealand economy only expanded by 0.4% in Q4 2016, which is half of the downwardly revised 0.8% rate of expansion in Q3 2016, as well as below the +0.7% consensus for the quarter. This marks the slowest quarter-on-quarter rate of expansion in six quarters. Moreover, the year-on-year reading of 2.7% is the slowest in four quarters and marks the second consecutive quarter of slowing annual growth.
Still, the Kiwi later recovered on Friday, as it also tracked commodity prices together with the Aussie. And that allowed the Kiwi to close out the week as a net winner. By the way, the RBNZ’s monetary policy statement is coming up next week, so you may wanna keep a close eye on the Kiwi.
The Canadian Dollar
We got another week of messy price action on the Loonie, with many Loonie pairs roughly range-bound for the entire week, which means that opposing currencies dominated price action on most Loonie pairs. There weren’t really any market-moving economic reports during the week and it probably didn’t help that oil’s price action was also limited, as market players grappled with the possibility that the positive effect from OPEC’s oil cut deal would be nullified by the continuing rise in U.S. oil rigs and oil output.
The Swiss Franc
There were bouts of uniform price action across Swissy pairs, but overall, the Swissy ‘s price action was pretty mixed. This therefore implies that opposing currencies were more dominant. The Swissy was a net loser, though, and that’s probably because of the prevalence of risk appetite as mentioned earlier.
In fact, most of the major equity indices were in the green for the week, which likely dampened demand for the safe-haven Swissy.
- Shanghai Composite (SSEC) closed 0.76% higher to 3,237.31 for the week
- Hang Seng (HSI) closed 3.15% higher to 24,309.93 for the week
- Nikkei 225 (N225) closed 0.42% lower to 19,521.59 for the week
- The Euro Stoxx 50 (STOXX50E) closed 0.76% higher to 3,442.35 for the week
- The FTSE 100 (FTSE) closed 1.12% higher to 7,424.96 for the week
- The DAX (GDAXI) closed 1.10% higher to 12,095.24 for the week
- S&P 500 (SPX) closed 0.24% higher to 2,378.25 for the week
- Nasdaq Composite (IXIC) closed 0.67% higher to 5,901.00 for the week
Okay, here’s this week’s scorecard:
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!