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 yen just steamrolled its forex rivals this week, since 7 of the top 10 movers are yen pairs, with the yen winning out in all of ‘em. Meanwhile, the Greenback got whupped this week, since it lost out to everything else. So, what was driving price action on these currencies? And how did the other currencies fare this week? Well, time to find out!
The Japanese Yen
The mighty yen scored another triumphant week. Unlike last week, however, the yen’s victory this week was total and absolute. Heck, I even mentioned earlier that 7 of the top 10 movers were yen pairs, with the yen victorious in all of ‘em.
And while the bond markets of a large part of the world (and equities and commodities markets for that matter) were closed for Good Friday, the yen did track bond yields rather closely from Monday to Thursday.
Safe-haven demand for bonds picked up on Monday, which caused bond yields to fall. And market analysts attributed the safe-haven demand for bonds (and probably the yen itself) to several factors, which include the French presidential elections, the potential physical conflict between the U.S. and North Korea, and fears that the U.S. may escalate its activities in Syria after The Donald ordered a missile strike to punish democratically-elected dictator Assad for allegedly gassing beautiful babies.
The above geopolitical risks continued to dampen risk appetite and spur safe-haven demand on Tuesday, market analysts say, so bond yields slumped once more. Bond yields steadied on Wednesday, but plunged near the end of the day, thanks to Trump’s comments to The Wall Street Journal, particularly his comment that he would prefer that interest rates be kept low.
Interestingly enough, only USD/JPY followed suit. GBP/JPY and CAD/JPY also slid lower, but not as much. Other yen pairs, meanwhile, continued to trade roughly sideways.
The probable reason for this weirdness is that Trump also commented that the U.S. dollar “is getting too strong” during the interview with the Wall Street Journal. And that very likely amplified the Greenback’s weakness to the yen.
However, the weakened Greenback reinforced the other currencies, making them less vulnerable to the yen. And since risk aversion only worsened after Trump’s comments, that likely gave the lower-yielding euro and the safe-haven Swissy a boost.
Greenback weakness and Trump’s comments about wanting lower rates, meanwhile, likely caused demand for the higher-yielding Aussie and Kiwi to pick up, which then allowed the two comdolls to put up a fight against the yen, limiting their losses.
Moving on, bond yields steadied again on Thursday. The yen was also steady for the most part, although AUD/JPY and NZD/JPY were clear exceptions, which means that demand for the two currencies were stronger, but we’ll discuss more about that later when we get to the Kiwi and the Aussie.
Later, during Thursday’s late U.S. session, the yen began uniformly gaining strength again, since there were signs of risk aversion, with geopolitical risks once again being cited as one of the major reasons for the feelings of doom and gloom in the markets.
And while most markets were closed on Good Friday, geopolitical risks likely continued to send safe-haven flows towards the yen, since the yen extended its gains during the course of the day to end up as the one currency to rule them all this week.
The U.S. Dollar
The Greenback had a bad run this week. However, the Greenback’s price action was actually a bit mixed. The Greenback even traded roughly sideways against some of its peers on Monday, Tuesday, Thursday, and Friday. What’s very clear, however, is that the Greenback lost across the board during Wednesday’s late U.S. session. And this loss is the primary reason why the Greenback was the main loser this week.
We already touched upon the main culprit for the Greenback’s weakness when we discussed the yen earlier. But if you skipped the discussion on the yen, then just know that the main culprit was this guy.
Although I’m sure some people, including The Donald’s former enemies (interestingly enough) and Greenback bears, view him more as this.
As for specifics, The Donald said in a Wall Street Journal interview that (emphasis mine):
“I do like a low interest rate policy, if I must be honest with you. I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me. But, you know, that’s hurting — that will hurt ultimately. Look, there’s some very good things about a strong dollar, but usually speaking the best thing about it is that it sounds good, you know. It’s very, very hard to compete when you have a strong dollar and other countries are devaluing their currency. It’s very hard for our manufacturers to compete.”
Aside from Trump blatantly talking smack about the Greenback, some market analysts also say that Trump’s comment about preferring low interest rates is a sign that Trump will likely be choosing less hawkish U.S. Fed governors to replace Tarullo and fill up the two other vacant seats in the Fed. And that apparently dampened speculation for a hawkish Fed and an acceleration in the pace of hiking, weakening demand for the Greenback in the process.
And according to the CME Group’s FedWatch Tool, expectations for two more rate hikes by December fell below 50% after Trump’s comments and then fell even further from 43.8% to 40.2% on Thursday.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Pound Sterling
The pound got the stuffing beaten out of it last week. This week, however, the pound bounced back and even ended up as the second-strongest currency of the week. And the pound’s recovery was due to the U.K.’s overall upbeat economic reports, especially the U.K.’s March inflation report.
According to the U.K. Office for National Statistics (ONS), CPI increased by 0.4% month-on-month in March, beating expectations for a 0.3% increase.
Year-on-year, CPI rose by 2.3%, which is in-line with expectations and matches February’s reading. Even so, the 2.3% rate of annual increase is the fastest since April 2009. In addition, the 2.3% increase exceeds the BOE’s staff forecast of 2.1%, as laid out in the BOE’s February Inflation Report.
This marks the second straight month that CPI was above both the BOE’s 2.0% inflation target, as well as the BOE’s staff forecasts. And remember, the minutes of the BOE’s March huddle revealed that “some members 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.” Rate hike expectations were therefore very likely in play as well.
Moving on, the U.K. also released its latest jobs report. And the pound initially tried to climb higher because the headline numbers looked good, particularly wage growth. However, digging a little deeper shows that wage growth wasn’t really that impressive, which is likely why the pound was not able to muster enough buyers.
I think I did a rather good job of breaking down the U.K.’s jobs report in Wednesday’s London session recap, so I’ll just copy-paste my write-up for that here, with emphasis on the more negative aspects of the report.
According to the latest jobs report released by the Office for National Statistics (ONS), the U.K.’s jobless rate held steady 4.7% in the three months to February. This is great because the reading is the lowest since the July-September 2005 reporting period.
The employment rate, meanwhile, also held steady at 74.6%, the highest reading since comparable records began in 1971.
On a slightly more downbeat note, the number of people claiming unemployment benefits rose by 25.5K in March, instead of falling further by 10.2K.
As for wages, nominal average weekly earnings (bonuses included) grew by 2.9% year-on-year in February, with a three-month average of 2.3%. This is the fastest year-on-year increase in three months. Moreover, the three-month average matches the previous reading and even managed to beat the consensus that it would slow to +2.2%.
However, the faster wage growth was partially due to the 13.1% surge in bonuses. If bonuses are stripped, then average weekly earnings only grew by 1.9%, which is the weakest reading in 11 months. Although the three-month average comes in at 2.2%, which is a tick higher than the +2.1% consensus. Still, that’s the lowest three-month average reading in seven months.
In real terms (inflation is taken into account), real average weekly earnings (including bonuses) increased by 0.5%. Even better, the previous reading was revised from a 0.2% fall to a stagnant 0.0%. But if bonuses are excluded, then real average weekly earnings fell by 0.4% year-on-year. This is the first negative reading since August 2014.
Moving right along, the pound’s price action became mixed on Thursday before steadying on Friday. The pound’s earlier jump because of the inflation report gave the pound the winning edge against most of its peers, though.
The Australian Dollar
The Aussie was range-bound while showing slight weakness from Monday until Wednesday’s London session, very likely because of the risk-off mood at the time. Fortunately for Aussie bulls, The Donald’s comment in a Wall Street Journal interview that he likes a low interest rate policy and that he thinks the Greenback “is getting too strong” gave the Aussie a bullish boost.
Demand for the Aussie was so strong that the Aussie even shrugged off the plunge in iron ore prices and risk aversion at the time.
Trump’s comment about preferring lower interest rates, in particular, probably had more impact, since it dampened rate hike expectations. This then made the higher-yielders relatively more attractive again, given that the Kiwi also found broad-based demand after Trump’s interview made the rounds, as well as the fact that the higher-yielding Aussie and Kiwi both stood their ground against the mighty yen, even though commodities were sliding and risk aversion prevailed at the time.
The Aussie later got another bullish boost when Australia’s jobs report was released. In fact, Australia’s jobs report was the one catalyst that allowed the Aussie to edge out a win against the Kiwi.
As for specifics, the Australian economy generated a net increase of 60.9K jobs in March, which is the largest increase since September 2015 and easily beats the +20.3K consensus.
Although an upside surprise is not really all that surprising because as Forex Gump pointed out in his Forex Preview for Australia’s jobs report, leading labor indicators were pointing to an acceleration in jobs growth while economists historically tend to undershoot their estimates during the March period, resulting in more upside surprises.
Anyhow, the net increase in jobs was due to the net increase of 74.5K jobs, which was partially offset by the loss of 13.6K part-time jobs. This is the biggest net increase in full-time jobs in almost 20 years. Wowsers! In additions, the previous reading was also upgraded from a net loss of 6.4K jobs to a small net gain of 2.8K. And monthly hours worked increased by 3.2 million to boot.
Despite the large gain in jobs, the jobless rate held steady at 5.9%. No worries, though, since the labor force participation rate jumped from 64.6% to 64.8%, which is the best reading since June 2016. This means that the Australian economy did a good job of absorbing the influx of new and returning workers, which is great.
It’s therefore not very surprising that the market reacted by pouncing on the Aussie and bidding it higher. Although bullish momentum later lost steam, likely because of profit-taking ahead of the long weekend.
The New Zealand Dollar
The Kiwi was actually a net loser from Monday until Wednesday’s U.S. session, very likely because of the risk-off vibes, which dampened demand for the higher-yielding Kiwi.
Like the Aussie, however, the Kiwi got a bullish infusion after Trump’s Wall Street Journal interview made the rounds. And this bullish infusion allowed the Kiwi to retake some lost ground against the yen while recouping its losses against its other rivals (and then some).
Heck, the Kiwi even began to win out against the Aussie, possibly because the Kiwi still offers higher yields compared to the Aussie, making the Kiwi more attractive.
In fact, the Kiwi would have been the third best-performing currency this week if it weren’t for Australia’s pesky jobs report, which caused traders to flock back to the Aussie, pushing AUD/NZD back up and dealing the Kiwi a narrow defeat in the process. Although that would also depend on your data feed, since some brokers show the Kiwi edging out a slim win against the Aussie.
The Canadian Dollar
The Loonie had a mixed performance this week. Although the Loonie actually had a promising start, since the Loonie rode the oil rally on Monday (chart for oil is inverted). And the oil rally, in turn, was due to reports that oil production in Libya got halted again.
Oil steadied on Tuesday before resuming its rally on Wednesday. The Loonie, meanwhile, also steadied for the most part on Tuesday, but refused to track rallying oil prices on Wednesday, probably because forex traders were hunkering down for the BOC statement.
And when the BOC statement did finally roll around, the BOC kept the overnight rate at 0.50% as expected. The BOC’s forecasts, meanwhile, were mixed, since the BOC upgraded its GDP projections for Q1 2017 from 2.5% quarter-on-quarter annualized to 3.8% and released a new forecast that Q2 GDP will expand by 2.5%.
Because of these upgrades, Canada’s GDP is now expected to grow by 2.5% year-on-year by Q4 (+2.3% previous). Although the BOC downgraded its forecast for Q4 2018 from 2.2% to 1.9%. And a new forecast for 2019 shows that the BOC expects the annual pace of GDP growth to slow even further to 1.5%.
The weakening pace of GDP growth was attributed by the BOC to temporary factors, such as “a temporary boost from the Canada Child Benefit” to consumer spending and the “a resumption of spending in the oil and gas sector,” which are expected to fade away. Also, exports and business investment are expected to remain subdued, which would hurt growth down the road.
Regarding inflation, the BOC upgraded its forecast for Q1 2017 from 1.8% to 2.0%. However, the BOC asserts that the expected faster increase in Q1 “reflects stronger increases in prices for passenger vehicles and some services,” which are only temporary. As such, the BOC expects CPI to weaken in Q2. Even so, the BOC upgraded its projections for 2018 from 2.0% to 2.1% while presenting a new forecast that 2019 would also print a 2.1% year-on-year increase by Q4.
Despite the mixed forecasts, the BOC’s official press statement sounded a bit less worried compared to its previous press statement. As for specifics, the BOC noted in the recent statement that:
“The Bank’s Governing Council acknowledges the strength of recent data, some of which is temporary, and is mindful of the significant uncertainties weighing on the outlook. In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent..”
In contrast, the BOC noted in the previous statement that:
“The Bank’s Governing Council remains attentive to the impact of significant uncertainties weighing on the outlook and continues to monitor risks outlined in the January MPR. In this context, Governing Council judges that the current stance of monetary policy is still appropriate and maintains the target for the overnight rate at 1/2 per cent.”
This seeming change in tone probably enticed Loonie bulls to charge in. Although bears soon began to return when Poloz had his presser.
You see, Poloz highlighted a potential housing bubble in Canada when he said the following (emphasis mine):
“I would just note that consumer credit is only growing in Canada by around 5 percent per year, mortgage credit by about 6 percent. And so there is no credit boom to go with that speculative phase and so it’s in that sense there are checks and balances lying around.”
“As we’ve observed more than a year ago in the case of Vancouver, where we had similar kind of data points, when there is that large of a gap between what fundamentals might say and what you actually observe, then there is very unlikely to be a sustainable rate of price increase and I think it is timely to remind folks that prices of houses can go down as well as up.”
More Loonie bulls later charged in, though, probably because Poloz communicated that the BOC is now less likely to cut again when he said the following (emphasis mine):
“When we [BOC officials] talked about that [a potential rate cut] a few months ago we had seen a series of disappointing data points that led us to believe that the risks were beginning to tilt towards to the downside and the uncertainties that we were dealing with were similarly negative. And so it’s in that context that we discussed the possibility of easing. But in this context, given the data that we’ve seen in the last few months, I can quite clearly say no, a rate cut was not on the table at this time.”
And while Poloz fired up the rhetoric of a potential housing bubble, there’s a silver lining, since the risk of a housing bubble means that the BOC is less likely to cut further (emphasis mine):
“There’s no question that having had low interest rates for some time that has been one of the things contributing to more demand for housing. That’s why we’ve had low interest rates, to boost the economy and that’s one of the main channels. But an interest rate of either 3 or 4 percent for a mortgage is not going to change someone’s mind if they’ve made they are basing their decision on the assumption that the price of the house is going to rise by another 20 percent next year. Interest rates are not what is fuelling that speculation, it does add to demand at the bottom, of course.”
The Loonie steadily advanced after that before finding a bottom during Thursday’s London session. The Loonie then got swamped by a torrent of sellers when the U.S. session rolled around. The catalyst for the Loonie’s weakness is not very clear, but it’s possible that market players got spooked when Canada’s New Housing Price Index (NHPI) printed a 0.4% increase, which may then have stoked housing market fears, especially since the BOC was just talking about it during the previous day.
The Loonie also got hit by another wave of sellers when Poloz testified before the Standing Senate Committee on Banking, Trade and Commerce, which is kinda weird because Poloz’s opening speech and answers to the Q&A portion were not really all that different from his presser after the BOC statement.
Anyhow, the Loonie’s early strength and later weakness, together with opposing currency price action, are the reasons why the Loonie had somewhat uniform price action this week, but still ended up having a mixed performance.
Just like last week, the euro’s price action was rather messy, which indicates that opposing currencies dictated price action on most euro pairs. This time, however, the euro ended up being a net loser. In fact, the euro was the second worst-performing currency of the week.
Notwithstanding the messy price action, market analysts blamed the euro’s overall weakness mainly to jitters ahead of the first round of the French presidential elections.
Jean-Luc Melenchon’s surge in the polls, in particular, was being cited as the main reason for the election jitters, since the far-left Melenchon has expressed some anti-EU sentiment. This puts two anti-EU candidates on the field for a four-way race, with Front National’s Marine Le Pen attracting right-leaning voters.
As such, the voting base for Macron and Fillon, who are both considered the status quo candidates, may end up being divided, making the first round of the French presidential elections rather difficult to call, which naturally generated uncertainty. Also, there’s now a chance that two anti-EU candidates may end up as the choices for the second round of the elections.
Anyhow, voting intentions as of April 14 had Le Pen leading the pack with 23%. Macron comes in second place with 22%. Meanwhile, Fillon’s in third place with 20%. As for Melenchon, he’s in fourth place with 17%. The rest have voting intentions in the single digits (or none at all).
The Swiss Franc
The Swissy had a repeat of last week’s performance, since the safe-haven Swissy was a net loser yet again, even though risk aversion was the dominant sentiment, given all the geopolitical risks nowadays.
Like last week, there was no clear reason for this wonky price action, although I still have a sneaking suspicion that the SNB was busy fighting off the safe-haven demand for the Swissy by intervening in the forex market again (*cough* currency manipulator *cough*).
Okay, here’s this week’s scorecard: