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 Aussie was the top dog last week but had a reversal of fortune and ended up at the very bottom this week. Meanwhile, the yen had another good run and even ended up dethroning the Aussie. So, what drove price action on these currencies? And how did the other currencies fare this? Read on and find out!
But before that, we’ll talk about the Greenback first.
The U.S. Dollar
I normally start by discussing the best-performing currency or the worst-performing currency of the week. The Greenback was neither, but I’m gonna start with the Greenback anyway because price action in the forex market (and other markets for that matter) was heavily linked to events in the U.S., particularly the vote on the U.S. healthcare bill.
You see, a new narrative began making the rounds that the vote on the U.S. healthcare bill is supposedly viewed by the market as a test of Trump’s influence over his own Party, as well as Trump’s ability to push through with his agenda, including his highly-anticipated fiscal stimulus plans.
As to why the vote on the healthcare bill is linked to Trump’s fiscal stimulus plans, well, you can listen to The Donald explain it himself here or click the pic below to go to a YouTube video.
In very basic terms, Obamacare is a drain on the Federal budget. And replacing Obamacare with Ryancare would reduce the Federal budget deficit by tens if not hundreds of billions of dollars in the long-term. This would then give Trump a rough idea on the level of tax cuts they can afford to introduce without burdening the Federal government too much.
Now you know, and according to the wisdom of G.I. Joe, knowing is half the battle.
Anyhow, this new narrative began spreading on Tuesday, which is why the Greenback got whupped hard pretty much across the board, especially since there were growing fears that not enough Republicans would rally to vote in favor.
After the initial weakness, the Greenback’s price action became mixed but was mostly range-bound, as forex traders waited for the vote on the healthcare bill. And as it turns out, the Republicans ultimately decided to pull the healthcare bill late on Friday, rather than put it to a vote in the House after Paul Ryan told Trump that he (Ryan) could not muster enough Republican votes to counter the Democrats and ensure that the bill would get passed.
The Greenback got bid higher on this news, which is rather weird. A possible reason is profit-taking by the shorts to avoid weekend risk. Although some market analysts also say that the jump was due to bargain buying because of reduced uncertainty.
Anyhow, the damage was already done, but it sure makes you wonder how the Greenback will fare next week, huh? Although that would probably depend mostly on what Trump’s next move is gonna be, particularly with regard to his fiscal stimulus plans.
The Australian Dollar
In a reversal of fortune that’s as difficult to believe as Australia’s Great Emu War of 1932, the Aussie ended up as this week’s worst-performing currency after being the best-performing currency last week.
There were early signs of trouble for the Aussie when the RBA’s monetary policy meeting minutes got released. You see, the RBA was still optimistic, but it was noticeably less optimistic compared to the March 7 RBA statement.
For example, the RBA statement didn’t mention anything negative about the labor market. However, the minutes revealed that the RBA is concerned that jobs growth was “concentrated in part-time jobs over the past year and wage growth had remained low, suggesting that the labour market had not been quite as strong as the headline employment and unemployment rate figures had indicated.”
Another example is that the RBA statement noted that consumer spending “was stronger towards the end of the year, although growth in household income remains low.” However, the minutes also pointed out that “although credit growth was lower than in previous decades, it had been faster than the subdued growth in household incomes.” In short, consumer spending was driven largely by higher debt rather than higher income. And debt-driven growth is usually not very sustainable, especially if income levels do not catch up.
Moving on, another factor that very likely had a much bigger and prolonged impact on the Aussie’s price action this week was the commodities slide, which started on Tuesday. And commodities began broadly sliding because of wavering faith in Trump’s fiscal stimulus plans.
After all, commodities have been steadily climbing higher in the past few months partly because of heavy speculation on Trump’s planned trillion-dollar infrastructure program. And as we discussed earlier, there was a narrative that the vote on the U.S. healthcare bill is a test of Trump’s ability to push through with his fiscal stimulus plans.
Admittedly, however, the slide in commodity prices was not very severe. Although iron ore, Australia’s main commodity export, was a clear exception, since it printed a whopping 7.9% slump to $85.06 per dry metric ton for the week. This is one of the hardest weekly drops since December.
Aside from Trump-related worries, market analyst blamed the extra hard slump in iron ore prices on China’s attempts to curb the Chinese property market and oversupply jitters after it was reported that iron ore stockpiles in China reached a record high of 132.5 million tons.
Incidentally (well, not really), iron ore started diving on Tuesday, when iron ore prices plunged by around 4% for the day. Iron ore then continued to slide ever lower after that (down 7.9% for the week, as mentioned earlier), dragging the poor Aussie with it.
The Japanese Yen
As usual, yen pairs were still tracking bond yields for the most part, particularly U.S. bonds yields.
As you can see in the chart above, yen pairs captured the bulk of their gains on Tuesday and Wednesday. And as you can see below, bond yields plunged pretty hard on Tuesday and Wednesday. And you probably already have an idea as to why.
But just in case just skipped my write-up on the Greenback (shame on you), market analysts blamed the plunge in bond yields to bond-buying on expectations that Trump’s fiscal stimulus plans would get delayed, thanks to worries over the vote on the healthcare bill.
Having said that, bond yields recovered a bit on Thursday, thanks to optimism that the healthcare bill may pass, market analysts say. However, the yen slightly decoupled from bond yields, since it tried to strengthen even further. Some market analysts attributed this to safe-haven demand for the yen from hedge funds, thanks to heightened political uncertainty in Japan after Japanese Prime Minister Shinzo Abe got embroiled in a real estate scandal.
Moving right along, bond yields resumed sliding ahead of the vote on the U.S. healthcare bill on Friday. The yen’s price action was more mixed, though, so opposing currencies apparently had an upper hand. Even so, the yen broadly weakened late on Friday, when bond yields swung higher after word got around that the Republicans decided to pull the healthcare bill.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Canadian Dollar
Price action was on the Loonie was a bit choppy but still recognizably uniform, since Loonie pairs appeared to be roughly tracking oil prices for the most part (chart for oil is inverted).
And since oil benchmarks were down for the week, it also followed that the Loonie ended up being a net loser.
- U.S. WTI crude oil down (CLG6) by 1.39% to $48.10 per barrel for the week
- Brent crude oil down (LCOH6) by 1.49% to $50.99 per barrel for the week
As to what drove oil lower this week (aside from Trump related worries), market analysts pointed to persistent worries that the positive effects of OPEC’s oil cut deal is being offset by rising U.S. oil output.
Interestingly enough, there was this positive news for Canada on Friday.
— Donald J. Trump (@realDonaldTrump) March 24, 2017
However, the Loonie continued to weaken on Friday, even as oil staged a recovery. And the very likely reason for the Loonie’s weakness on Friday is that traders were more focused on Canada’s inflation report, since it supported the BOC’s dovish stance.
As for specifics, headline CPI rose by 0.2% in February as expected. Even so, it’s a sudden slowdown compared to January’s 23-month high of +0.9%. Year-on-year, headline CPI ticked lower from January’s 15-month high of +2.1% to +2.0%, thanks mainly to the 2.3% drop in food prices. Looks like the BOC was right on the money, at least with regard to food prices, when it warned that CPI would be pulled down by the “disinflationary effect of food prices and excess capacity through most of the year.”
Also, do note that while the approval of the Keystone Pipeline may be good for Canada, some market analysts were quick to point out several obstacles that have to be overcome, which include legal hurdles in obtaining local permits, dealing with affected landowners, and stiff resistance from environmental groups (among others).
The Pound Sterling
The pound had another good run this week. Like last week, however, the ride was also a rather choppy one.
With that said, the pound started the week on the back foot, thanks to the announcement that Theresa May would be triggering Article 50 of the TEU on March 29 in order to start the formal process for an actual Brexit.
No worries, though, since pound bulls would later charge in on Tuesday, thanks to the better-than-expected readings for the U.K.’s headline inflation.
As for specifics, headline CPI rose by 0.7% month-on-month during the February period. This is the best monthly reading since since April 2013, which is awesome. Even more awesome is that headline CPI surged by 2.3% year-on-year. This is the best reading since September 2013 and marks the fourth consecutive month of accelerating year-on-year readings.
Moreover, the year-on-year reading already exceeds the BOE’s 2.0% target, not to mention the fact that it’s within the upper limits of the BOE’s staff forecast of 1.9% to 2.3% for February. And these impressive readings apparently stoked expectations that the BOE may be compelled to hike soon.
Moving on, the pound gave back some of its gains on Wednesday. There were no apparent catalysts, but the weakness during Wednesday’s morning London session was likely due to profit-taking amid jitters ahead Scotland’s Parliamentary debate and vote on backing another Scottish independence referendum. However, the pound got dragged even lower during the late London/early U.S. session, thanks to the terrorist attack in London. The pound later recovered, though, after reports came out that the terrorist finally got neutralized.
It also probably helped (pound bulls) that the Scottish Parliament decided to delay the vote on whether to not to have another Scottish referendum, thanks to the terrorist attack.
After that, the pound began grudgingly grinding higher ahead of the U.K.’s retail sales report. And when the retail sales report did get released, it turned out to be another awesome economic report, since retail sales volume surged by 1.4% month-on-month in February, easily outpacing the +0.4% consensus and wiping out the 0.5% decline in January. Not only that, the surge in February is the first positive reading after three consecutive months of declines.
The year-on-year reading is also pretty impressive, since it printed a 3.7% increase, which is much faster than the +2.6% consensus, as well as the previous month’s +1.0%. Moreover, the the faster increase puts an end to four straight months of ever weaker year-on-year readings.
Despite the impressive numbers, however, the pound only grudgingly appreciated against its peers. There was no clear reason why, but it looks like market players were using the retail sales report to take some profits off the table, since the pound’s attempts to rally further were met by sellers until the pound finally began to broadly dip a bit on Friday.
As to why pound bulls were not too keen on pushing the pound higher, well, that’s probably to avoid weekend risk and to bag some profits ahead of March 29, which is when Theresa May would trigger Article 50, as mentioned earlier. In addition, the Scottish Parliament announced that the debate and vote on starting another Scottish independence referendum would resume on Tuesday next week.
Hmm. That’s back-to-back risk events for the pound next week right there.
The New Zealand Dollar
The Kiwi may have had a mixed performance this week, but price action on Kiwi pairs did show a certain level of uniformity.
Having said that, the Kiwi had a mixed Monday before getting weighed down by sliding commodity prices on Tuesday. Luckily for the Kiwi, the latest dairy auction printed a 1.7% increase for the GDT index, which is the first increase after decreases in the past two auctions.
The Kiwi’s price action diverged after that, so opposing currencies were in control. However, the positive reading for the GDP index probably shielded the Kiwi since its losses were limited despite the slide in commodity prices. In fact, the Kiwi was even giving its fellow comdolls a good beating.
After that, the Kiwi began to dip ahead of the RBNZ statement. And when the RBNZ did release its, umm, official press release, the Kiwi appeared confused as it tossed and turned. Forex Gump has the details on the RBNZ statement here, so read up on that if you want the details. The short of it, though, is that the RBNZ was optimistic, but retained its neutral monetary policy bias while repeating its mantra that the Kiwi is still too strong.
The Kiwi’s confused reaction to the RBNZ statement was probably because some traders were expecting the RBNZ to be a bit more dovish given the slowdown in its GDP growth. Other traders, meanwhile, were probably expecting the RBNZ to be more hawkish, given the Kiwi’s recent slide and the surge in inflation. And since the RBNZ maintained its very neutral tone, both camps were disappointed.
Anyhow, the Kiwi’s price action became mixed again before broadly weakening on Friday, probably because commodities continued to dip, as well as the prevalence of risk aversion ahead of the vote on the U.S. healthcare bill and New Zealand’s trade report, which showed an $18 million deficit, missing expectations of a $160 million surplus.
The Kiwi later got bid higher when the early U.S. session rolled around, however, very likely because the ratings agency Moody’s announced that it was affirming New Zealand’s “AAA” rating, as well as New Zealand’s “stable” outlook because of New Zealand’s “very high economic resilience.” In fact Moody’s “expects New Zealand’s economy to be among the fastest growing Aaa-rated economies in coming years.”
The euro’s price action was rather messy this week, which implies that opposing currencies dominated price action on euro pairs. However, the euro did show uniform price action on Tuesday when the euro gained strength across the board.
And that was apparently due to poll results which showed that Macron supposedly won the French presidential debates. Not only that, Macron’s poll numbers were comfortably better than the numbers that the anti-EU Marine Le Pen got. And this was apparently taken by the market as a sign that Le Pen will probably lose, thereby eliminating a possible catalyst for the French version of Brexit.
The Swiss Franc
The Swissy’s price action looks like a mess at first glance. But if you remove “strong” currencies like the pound and the yen, then you get this.
As to what drove demand for the Swissy, well, there were plenty of risk events this week that could have spurred safe-haven demand for the Swissy, which include but are not limited to the vote on the U.S. healthcare bill, Brexit process starting next week, uncertainty on the French elections, and terrorist attacks in Europe. The attack in London wasn’t the only one, you know. There were also attempted terrorist attacks in Belgium and Italy, with a moving vehicle and knives being the weapons of choice in all events. Thankfully, only very minimal casualties for the other two events.
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!