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?
You probably already know that the euro performed very well this week, but did you also know that the pound did well and that the Kiwi and yen got crushed? Whoa! Four currencies were in play this week? That’s got to be a first. Anyhow, what drove price action on these currencies? And how did the other currencies fare this week? Let’s try and find out, shall we?
The euro was the one currency that ruled them all this week, and everybody already knows why. But if you’re a hardcore technical analyst who got curious as to why the euro gapped higher, or you just woke up from a coma, or some other reason like that, then just know that the euro gapped higher against all its peers when the new trading week rolled around, thanks to the first round of the French Presidential elections.
Macron, who is viewed as the pro-EU and status quo candidate, managed to capture around 24% of the votes while the anti-EU Le Pen only got around 22%, even though there was a terrorist shooting in Paris and an attempted stabbing just days before the elections, which should have given Le Pen a boost.
Macron’s victory was therefore very reassuring for the market. And all the more so, given that Macron has a rather wide lead against Le Pen in the second round of the elections.
The euro then spent the rest of Monday by either steadying or slightly dipping, likely because of profit-taking. However, the “feel good” vibes about the French elections apparently continued on Tuesday, since the euro continued to trade higher without any apparent catalyst.
After that, the euro’s price action became mixed on Wednesday but showed mostly weakness, probably because of profit-taking ahead of the ECB statement and presser on Thursday.
The ECB statement was basically a dud since the ECB decided to just maintain its current monetary policy. The ECB presser gave the euro a volatility injection, though, since ECB Overlord Draghi’s had this rather upbeat assessment of the Euro Zone’s economy, which caused the euro to initially jump higher (emphasis mine):
“Incoming data since our meeting in early March confirm that the cyclical recovery of the euro area economy is becoming increasingly solid and that downside risks have further diminished.”
“Let me now explain our assessment in greater detail, starting with the economic analysis. Euro area real GDP increased by 0.5%, quarter on quarter, in the fourth quarter of 2016, following a growth rate of 0.4% in the third quarter. Incoming data, notably survey results, bolster our confidence that the ongoing economic expansion will continue to firm and broaden. The pass-through of our monetary policy measures is supporting domestic demand and facilitates the ongoing deleveraging process. The recovery in investment continues to benefit from very favourable financing conditions and improvements in corporate profitability. Employment gains, which are also benefiting from past labour market reforms, are supporting real disposable income and private consumption. Moreover, the signs of a stronger global recovery and increasing global trade suggest that foreign demand should increasingly add to the overall resilience of the economic expansion in the euro area.”
Pretty upbeat overall, although Draghi and company still think that external factors pose a downside risk, but at least risks from within the Euro Zone seem to be abating.
“The risks surrounding the euro area growth outlook, while moving towards a more balanced configuration, are still tilted to the downside and relate predominantly to global factors.”
However, Draghi was later asked about inflation and he said the following (emphasis mine):
“Let me now say something about inflation. Headline inflation declined stronger than expected in March, reflecting lower inflation rates for all main components, and underlying inflation remained subdued. The short-term outlook was revised down due to lower oil prices and a weaker starting point for underlying inflation. Indicators of pipeline pressures show tentative signs of build-up of producers’ prices and upward pressure at the early stages of the pricing chain. Wage growth has been picking up slightly from a very subdued level, yet the outlook for wage growth remains uncertain. So market-based expectations – well, we can talk about market-based expectations. So in terms of my criteria, the assessment hasn’t really changed.”
“We have not seen any evidence, or any sufficient evidence, to alter our assessment about the inflation outlook, and we are not sufficiently confident that inflation will converge to levels consistent with our inflation aim in a durable, self-sustaining manner.”
Draghi’s downbeat comments on inflation apparently caused euro bulls to turn tail and run. Moreover, Draghi was asked if rate hikes were discussed and if the ECB talked about changing its easing bias. And Draghi answered by simply saying “no” to rate hikes and then quashed any notion of switching to a hiking bias by saying that “we didn’t discuss it” and that “we are not there yet.”
Moving on, the euro became mixed and then stabilized after Draghi disappointed the market, but began to get buyers before the Euro Zone’s inflation report was released, likely on speculation that Dovish Draghi was wrong about inflation.
And as it turns out, Draghi was wrong since April HICP rebounded by 1.9% year-on-year after dipping to 1.5% previously. Even better, the core reading jumped from 0.7% to 1.2%, which is the best reading since June 2013.
As a result, the euro spurted higher still when the inflation report was released. There was no follow-through buying, though. In fact, the euro began to encounter sellers, probably because market players who opened preemptive positions ahead of the report began to take some profits off the table to avoid weekend risk.
The Pound Sterling
The pound was a net winner yet again this week, marking the third consecutive week of pound strength. In fact, if the euro didn’t have those pesky gaps, then the pound would have easily been the king of pips (or queen if you like) this week.
What’s even more amazing is that the pound just shrugged off the poor economic reports thrown its way this week, including a slight miss for Q1 2017 q/q GDP growth (+0.3% vs. +0.4% expected, +0.7% previous). But then again, GDP did grow by 2.1% year-on-year, which is the fastest annual growth in seven quarters, so the GDP report was actually a bit mixed.
If the pound just ignored disappointing economic reports, than what was driving demand for the pound, you ask? Well, there’s always Brexit, or easing worries over Brexit to be more exact.
And Brexit-related jitters eased up a bit, very likely because of U.K. elections polls this week, which continued to give Theresa May’s Conservative Party a commanding lead, and raised expectations for a sweeping victory come June.
Our polling average update:
Con: 45.5% (+7.7)
Lab: 25.7% (-5.5)
LDem: 10.8% (+2.7)
UKIP: 8.7% (-4.2)
Grn: 3.4% (-0.4)
Chgs. w/ GE2015. pic.twitter.com/Q4wfaQCwPm
— Britain Elects (@britainelects) April 26, 2017
Most polls were released on Tuesday and Wednesday, which are the days in which the pound began to noticeably trend higher against its peers. The mighty euro, in particular, finally began to lose ground to the pound on Wednesday. This is very clear when you look at EUR/GBP’s price action.
And as I noted in Wednesday’s London session recap, there were two polls that gave the Conservative Party 49% of voting intentions. According to the London Evening Standard, which commissioned one of these polls, 49% is “the biggest Conservative lead recorded since September 2008, and matches the lead they enjoyed in May 1983 when Mrs Thatcher won a 144 majority.” And for reference, the Conservative Party currently only has a rather slim 17 working majority. It’s therefore not very surprising that pound bulls began to pile up on Wednesday.
And as a bonus, voting intentions for another Scottish independence referendum were still against having one, which also likely helped reduce jitters and stoke demand for the pound.
Scottish independence voting intention:
Yes: 45% (+1)
No: 55% (-1)
(via YouGov / 24 – 27 Apr)
Chgs. w/ Mar 2017
— Britain Elects (@britainelects) April 27, 2017
The New Zealand Dollar
The Kiwi was completely and utterly crushed this week.There are lots of analyses (that’s the plural of analysis, by the way) out there, including rather silly ones, such as the Kiwi getting dragged lower by the Aussie, which doesn’t make sense since the Kiwi was much weaker. Just compare them ranking tables, yo!
Anyhow, the Kiwi had a mixed yet steady start before getting swamped by sellers starting on Tuesday, as noted in Tuesday’s London session recap. There were no clear catalysts because New Zealand was commemorating the ANZAC day holiday. In addition, there was some risk-taking at the time and commodities were even staging a soft rally, which should have kept the higher-yielding Kiwi supported.
But as I noted in Tuesday’s London session recap, the Kiwi (and the Aussie as well) began to find sellers shortly after word got around that Trump plans to slap an import tax on Canadian lumber. The Kiwi’s reaction (as well as that of the Aussie’s) seems kinda strange at first, but it makes more sense when you consider that market players were very likely thinking about the future and the possibility that Trump’s protectionist policy may also result in tariffs on New Zealand’s exports.
And remember, a protectionist U.S. trade policy was one of the major external risk factors to New Zealand’s economic growth cited by RBNZ’s Wheeler during the February RBNZ statement and then emphasized again during Wheeler’s March 2 speech.
And as Wheeler explained in his March 2 speech, the U.S. doesn’t even have to directly impose tariffs on New Zealand in order to hurt New Zealand’s export-oriented economy (emphasis mine):
“Higher tariffs would raise prices for US consumers, could require a more accelerated tightening in monetary policy by the Federal Reserve, and could be expected to put upward pressure on the US dollar exchange rate. Furthermore, US tariffs would invite retaliatory actions by other countries. This would raise prices to consumers, and distort global supply chains as producers in the US and elsewhere change sources of supply and product destination.”
“New Zealand would not fare well in such circumstances. Even if our exports of goods and services to the US – currently over $8 billion – were not directly subject to higher tariffs, we would be hard hit by a downturn in the global economy, including among our main trading partners, in response to the direct and indirect impact of protectionist measures. We would experience lower global demand and weaker commodity prices. Our exporters would also experience efficiency losses and increased costs if they faced disruptions to established supply chains. We would also experience spillovers as foreign producers’ diverted trade in response to tariffs and more general trading conditions.”
Moreover, Trump was also supposedly thinking about slapping an import tax on Canadian dairy, according to White House Correspondent Trey Yingst. And that may have made Kiwi bulls extra nervous. After all, dairy products form the bulk of New Zealand’s exports. And an import tax on Canadian dairy products while simultaneously encouraging U.S. dairy farmers to produce more will likely have an adverse effect on dairy prices over time.
Trump says he may also put an import tax on dairy products coming from Canada.
— Trey Yingst (@TreyYingst) April 24, 2017
And an import tax on dairy products does seem legit since The Donald did tweet this later
Canada has made business for our dairy farmers in Wisconsin and other border states very difficult. We will not stand for this. Watch!
— Donald J. Trump (@realDonaldTrump) April 25, 2017
With that said, New Zealand did release mostly positive economic reports this week, but the Kiwi apparently chose to ignore them.
The Japanese Yen
The yen got whupped for the second week running. And as usual, the yen appears to be tracking bond yields for the most part, although there were some signs of decoupling, as you can see below.
The yen gapped lower against its peers while bond yields gapped higher when the new trading week opened. And that was all thanks to reduced uncertainty after the French Presidential elections.
The yen then got its butt kicked again on Tuesday, as bond yields surged on persistent risk-taking after the French elections, as well as optimistic speculation that Trump will deliver on his tax plans on Wednesday and that a U.S. government shutdown will be avoided on Friday, market analysts say.
Things then got a bit interesting on Wednesday because bond yields slipped lower, especially after Trump’s tax plans failed to impress, according to market analysts. However, yen pairs broadly decoupled since many opted to trade sideways instead of staging a recovery.
There were no apparent catalysts, but it’s possible market players were wary of buying up the yen ahead of the BOJ statement.
And speaking of the BOJ statement, the BOJ decided to maintain its current monetary policy as expected. However, the BOJ’s Outlook Report presented a rather upbeat picture, so much so that the BOJ used the term “moderate expansion” to refer to the Japanese economy, which market analyst say is a very hawkish sign since that’s the first time the BOJ used the term since March 2008. That’s probably why the yen tried to weakly advance against its peers even as bond yields rose during the early Asian session.
Unfortunately for yen bulls, the BOJ’s presser rolled around a few hours later. You see, BOJ Shogun Kuroda was asked about the BOJ’s exit strategy, given the BOJ’s upgraded economic forecasts and rather upbeat assessment and outlook. However, Kuroda answered by saying that “inflation is around zero percent,” so “Talking about a specific exit strategy now would cause undue confusion in markets.”
Kuroda also said that an exit strategy “will involve questions like what to do with our interest rate targets and our expanded balance sheet. What to do with these would depend on economic and price conditions at the time, so it’s too early to talk about a specific (exit) plan.”
Furthermore, Kuroda implied that the BOJ has no plans to let up on its JGB purchases by saying the following: “I don’t think we are facing any problems achieving our yield targets while having the 80-trillion-yen guidance in place.”
These disappointing developments from the BOJ are the most likely reasons why the yen continued to trade mostly sideways even as bond yields fell due to safe-haven demand for bonds, which market analysts linked to renewed jitters over geopolitical risks and persistent disappointment over Trump’s tax plans.
Finally, the yen got dragged lower when bond yields rose ahead of and shortly after the advanced Q1 U.S. GDP report was released. The reading for GDP was a miss, but market analysts say that rate hike odds and bond yields surged, because market players were more focused on U.S. core PCE rising by 2% and the U.S. employment cost index rising by 0.8%. Bond yields would later come crashing back down, though. And market analysts generally point to month-end buying by hedge funds and other large players.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Canadian Dollar
The Loonie had another rough week this week, partly because of another tumble in oil prices (chart for oil is inverted), which market analysts are still blaming on worries that the oil glut is here to stay because of rising U.S. oil output.
- U.S. crude oil down (CLG6) by 0.97% to $49.14 per barrel for the week
- Brent crude oil down (LCOH6) by 0.23% to $51.84 per barrel for the week
There were also other factors in play, with the first being Trump’s plan to impose tariffs on Canadian lumber, which caused the Loonie to slide a bit even as oil advanced.
The other was Trump’s decision to back down on killing NAFTA and agreeing to renegotiate with Mexico and Canada after some of his advisors convinced Trump to flip on his anti-NAFTA policy that he had been promoting for years. I guess that’s marks yet another sudden policy switch on the Trump record.
I received calls from the President of Mexico and the Prime Minister of Canada asking to renegotiate NAFTA rather than terminate. I agreed..
— Donald J. Trump (@realDonaldTrump) April 27, 2017
Other than those, housing market jitters were likely in play as well. After all, shares of Home Capital Group, Canada’s largest alternative mortgage lender, plunged by a whopping 65% on Wednesday after the company revealed that it acquired a CA$2 billion line of credit in order to try and remain solvent, which is very likely why the Loonie was under pressure despite recovering oil prices at the time.
Moreover, the Canada Mortgage And Housing Corporation rated Canada’s housing market as having “strong evidence of problematic conditions,” also on Wednesday.
This very likely drove home Canada’s housing market woes. And remember, the BOC did highlight a potential housing bubble during the BOC Statement and presser two weeks ago when BOC head honcho Poloz said that: “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.”
Jitters over Canada’s housing market are also the likely reasons as to why the Loonie quickly erased its gains after Trump backpedaled on killing NAFTA. They’re also probably the reasons why the Loonie continued to broadly weaken even as oil staged a recovery during Thursday’s U.S. session and on Friday, although there were also negative Canadian economic reports in Friday’s case, which may have helped to further dampen demand for the Loonie.
The Australian Dollar
The Aussie had a mixed performance this week, but had more losses than wins. And as mentioned earlier when we discussed the Kiwi, Trump’s decision to slap an import tax on Canadian lumber also caused the Kiwi and the Aussie to weaken.
Not only that, Australia’s Q1 2017 CPI was a slight miss on a quarter-on-quarter basis (0.5% vs. 0.6% expected), but what very likely caught the eye of astute market players was the 0.8% quarter-on-quarter increase in housing costs, which translates to a 2.5% year-on-year increase. And remember, the RBA did highlight a potential housing bubble in the April RBA minutes when it said that “developments in the labour and housing markets warranted careful monitoring over coming months” because “Risks related to household debt and the housing market more generally had increased over the preceding six months.”
However, this begs the question: If the Aussie had a negative catalyst while the Kiwi had positive catalysts (which were ignored), then why did the Aussie perform better compared to the Kiwi and even ended up mixed while the Kiwi got thoroughly thrashed?
The answer to that is that the Aussie’s weakness was cushioned by a week-long rally in iron ore prices, which is great because iron ore is Australia’s main commodity export. Market analysts were baffled as to what caused iron ore to rally, though. In fact, most market analysts were forecasting further falls. Oh well, such is life.
The Swiss Franc
The Swissy was a net winner this week and even ended up as the third best-performing currency after the euro and the pound. And if you’re having feelings of deja vu, then that’s because that’s also exactly what happened last week.
And very interestingly enough, it looks like the Swissy was tracking the euro’s price action much like it did years ago before the SNB decided to actively use forex intervention to fight off safe-haven demand for the Swissy and keep the Swissy down (*cough* currency manipulator *cough*).
And for the newbies who don’t know or can’t remember what it was like for the euro and the Swissy to be positively correlated, that had something to do with the Euro Zone being Switzerland’s main export partner, Germany and France in particular. So if the Euro Zone economy contracts, then that would also put the hurt on demand for Swiss exports. On the flip side, if the Euro Zone economy expands, then demand for chocolate, Swiss knives, watches, cuckoo clocks, and other Swiss exports also increases.
Anyhow, the Swissy followed the euro and gapped higher against most of its peers on Monday. The Swissy then tracked the euro higher on Tuesday, even though risk appetite was the dominant sentiment at the time, which should have gutted the safe-haven Swissy.
After that, the euro had a mixed performance on Wednesday. And can you guess how the Swissy’s price action fared?
Moving on, the euro stabilized ahead of the ECB presser and then tried to jump higher when Draghi said nice things only to erase its gains and then become mixed later. Quick! Guess what the Swissy did.
Finally, the euro steadied on Friday before rising ahead of and then jumping further after the Euro Zone’s inflation report was released before sliding back down again. As for the Swissy’s price action, well, you know the drill.
Makes you wonder if this will continue next week, huh? In addition, it also makes you wonder if the SNB’s currency manipulation power has been finally dulled after Switzerland was included in the U.S. Treasury’s Currency Report “Monitoring List” of countries that may be using “unfair currency practices.” Hah! Take that Jordan!
The U.S. Dollar
Like last week, the Greenback had a very mixed performance with lots of diverging price action, which indicates that opposing currencies had more sway in determining price action in Greenback pairs. As such, the Greenback whipped the comdolls and the yen but got whupped, in turn, by the European currencies.
There were some interesting events (which turned out to be duds), such as Trump’s tax plan below, which looks like a rehashed list of his old tax plan during the campaign trail. I don’t know if, as Forex Gump claims, market players are now setting the bar low when it comes to Trump-related events, but the disappointment only caused the Greenback to weaken across the board moderately.
— Zeke Miller (@ZekeJMiller) April 26, 2017
In addition, a U.S. government shutdown was apparently averted for a week, but that didn’t have a uniform impact on the Greenback.
Moreover, U.S. GDP growth increased by 0.7% quarter-on-quarter annualized, which means a quarter-on-quarter growth of only 0.17% or so. Either way, this is the slowest quarterly rate of expansion in three years, but market players were supposedly more focused on 2.0% rise in the core PCE price index, as well as the labor cost index (+0.8% vs. +0.6% previous), which was released at the same time, which is why the Greenback rose instead of tanking. Anyhow, another strange (and slightly boring) week for the Greenback.
Okay, here’s this week’s scorecard: