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?
Volatility this week was much tighter compared to last week, with only one major mover exceeding the 1% mark. With that said, the Swissy and the Kiwi suffered this week while the Greenback ruled all. How about the other currencies? How did they do this week? Well, time to find out!
The U.S. Dollar
The Greenback finally had a broad-based win and even ended up as the best-performing currency of the week. And this came after a few weeks of mixed and messy price action.
Looking at the overlay of several Greenback pairs above, however, we can see that the Greenback’s price action was still actually rather messy. As such, the strength or weakness of opposing currencies still had a degree of influence on the Greenback’s overall performance. And in the case of the Kiwi and the pound, negative catalysts for both the Kiwi and the pound actually helped to ensure the Greenback’s victory.
Having said that, the Greenback did have uniform price action when it showed broad-based strength on Monday and Tuesday. The Greenback then had another round of uniform price action when it kicked lower across the board during Friday’s U.S. session.
The two-day Greenback rally was attributed by market analysts to the surge in U.S. bond yields at the time. And the surge in U.S. bond yields, in turn, was due to the issuance of tens of billions worth of U.S. government and corporate bonds, as well as Macron’s victory over the weekend and high expectations of further hikes from the Fed, market analysts say.
After the two-day rally, the Greenback’s price action became a mixed mess, although most Greenback pairs were pretty much range-bound at this time.
The Greenback showed uniform price action again when it weakened broadly during the early U.S. session, thanks to the disappointing miss for U.S. April CPI and U.S. April retail sales, with CPI only rising by 0.2% month-on-month (+0.3% expected) and retail sales increasing only by 0.4% month-on-month (+0.6% expected).
Both monthly readings for CPI and retail sales were actually better compared to their respective previous readings (-0.3% for CPI and +0.1% for retail sales). Year-on-year, however, CPI only increased by 2.2% (+2.4% previous), which is the weakest annual reading in four months and marks the second month of weaker annual CPI. Retail sales, meanwhile, only increased by 4.5% year-on-year (+5.2% previous), which is also the weakest reading in four months.
Anyhow, the disappointing CPI and retail sales report reduced odds for a June rate hike from around 83% to just 78.5%, according to the CME Group’s FedWatch Tool.
More importantly, the disappointing reports apparently killed expectations for two more hikes by the end of the year since odds for two rate hikes by December dropped from 55.5% to just 47.4%, which is likely why U.S. bond yields plunged while the Greenback eased across the board.
The Swiss Franc
After being a net winner for several weeks, the Swiss franc finally got thrown to the bottom of the heap this week.
As to what drove the Swissy lower, that seems to have been due to Greenback demand at the expense of the Swissy, given the relatively large disparity between the performance of USD/CHF and the other Swissy pairs.
And USD/CHF, in turn, appears to be tracking U.S. bond yields for the most part. This is pretty clear when USD/CHF rose on Monday and Tuesday when U.S. bond yields were on the rise, and then tanked on Friday when U.S. bond yields plunged.
The Swissy was clearly extra weak on Monday and Tuesday, though. In fact, the Swissy even lost out to the euro, which was reeling at the time. And some market analysts blamed the Swissy’s extra weakness on monetary policy divergence, given that the SNB has made it clear that it has no plans to budge from its negative rate policy, as well as using forex intervention (*cough* currency manipulation *cough*) as a policy tool. In contrast, the U.S. Fed is on a hiking path while the ECB is expected to taper its asset purchase program.
That sounds reasonable, except that the euro initially lost ground to the yen. And remember: the BOJ also has negative rates and a bond-buying program that aims to keep bond yields of 10-year JGBs around 0%.
Another (and more likely) reason is that the SNB was sneakily weakening the Swissy again. And for those who don’t know, the SNB mainly targets USD/CHF and EUR/CHF when it conducts it currency manipulation, er, I mean “forex intervention” operations, as can be seen in the SNB’s foreign currency holdings.
One other likely reason being mentioned by market analysts is that Swissy longs were taking profits off the table. The most recent COT report from the CFTC does not appear to support this, though, since long contracts on the Swissy actually increased by 4,032, which is more than the 1,520 increase in Swissy short contracts.
However, I would just like to point out that the COT report shows positioning activity for the entire trading week ending on May 9, so it’s possible that profit-taking by Swissy shorts in the aftermath of Macron’s victory may have not been enough to offset the preemptive longs ahead of the French Presidential elections, resulting in a net increase in Swissy longs.
Anyhow, the bottom line is that nobody honestly really knows for sure why the Swissy was extra weak on Monday and Tuesday. There are three likely and often-cited reasons, and it’s even possible that all three reasons contributed to the Swissy’s slide. In any case, the fact still remains that the Swissy was the worst-performing currency of the week, and that’s thanks to the Swissy’s broad-based slide on Monday and Tuesday.
The New Zealand Dollar
The Kiwi had a reversal of fortune this week since it was the second weakest currency of the week after being the second strongest currency last week. And as you can see on the chart above, the Kiwi’s poor performance this week was entirely because of the RBNZ statement.
Forex Gump has a detailed review of the RBNZ statement, so read it here, if you’re interested. The short of it, however, is that recent economic reports, particularly the surge in Q1 CPI, made forex traders expect that the RBNZ would sound a bit more hawkish and perhaps even upgrade its OCR projections.
However, the RBNZ just shrugged off Q1’s strong CPI and decided to maintain its neutral monetary policy bias while also keeping its OCR projections unchanged to show that no rate hike is forthcoming until the later half of 2019. Worse, the RBNZ also downgraded its growth projections for early 2017, citing mainly the potential weakness in consumer spending due to poor wage growth, as well as weaker residential construction activity because of tighter lending restrictions to construction companies.
And as a result of these disappointing developments, Kiwi bulls scrambled for the exit, sending the Kiwi lower across the board.
The Other Currencies
Okay, here’s how the other currencies fared this week:
The Pound Sterling
The pound was the third worst-performing currency of the week. Interestingly enough, the pound actually had a very promising performance early on, since the pound stomped its rivals to the ground from Monday to Wednesday. The pound was already losing out to the mighty Greenback, though.
Anyhow, demand for the pound was likely due to preemptive bets that the BOE would be a bit more hawkish. Although poll results that continued to give Theresa May’s Conservative Party a sweeping lead likely helped to keep the pound supported as well.
Our polling average update:
Con: 46.5% (+8.7)
Lab: 28.4% (-2.8)
LDem: 10.0% (+1.9)
UKIP: 6.7% (-6.2)
Grn: 2.9% (-0.9)
Chgs w/ GE2015 pic.twitter.com/dDyO3NWMB9
— Britain Elects (@britainelects) May 8, 2017
Unfortunately for pound bulls, the U.K. released a bunch of disappointing economic reports a few hours before the BOE statement.
Specifically, industrial production in the U.K. fell by 0.5% month-on-month in March, which marks the third month of declines and is worse than the consensus for a 0.4% fall to boot. Year-on-year, this translates to a 1.4% increase, which is the weakest annual increase in five months and marks the fifth month of ever weaker annual industrial output.
Next, construction output in the U.K. fell by 0.7% month-on-month instead of rising by 0.3% as expected.
And finally, the U.K.’s trade deficit widened by £2.3 billion to £4.9 billion between February and March. Quarter-on-quarter, the U.K.’s trade deficit widened by £5.7 billion to £10.5 billion, so net trade was one of the major drags for the slow Q1 GDP growth.
These were just the appetizers, though. The main course was the BOE’s rate statement, and pound bears had a really delicious feast because of that.
As usual, Forex Gump has a write-up on the BOE’s statement, so read that here, if you want the details. The gist of it all, though, is that the BOE downgraded its growth forecasts for this year, which disappointed some market players, although the BOE did upgrade its forecasts for 2018 and 2019. Inflation for 2017, meanwhile, was upgraded, but the forecasts for 2018 and 2019 were downgraded, which likely disappointed other market players.
More importantly, the BOE admitted that its projections hinge on “the assumption that the adjustment to the United Kingdom’s new relationship with the European Union is smooth.” Also, BOE Guv’nah Carney admitted during the presser that the BOE didn’t have any contingency plans for a “disorderly negotiating process,” which very likely made many market players shake in their Baby Seal™ leather boots. After all, U.K. and E.U. officials haven’t been getting along, as noted in last week’s recap.
There was little follow-through selling (until Friday that is), though, since the BOE did note that ”if the economy follows a path broadly consistent with the May central projection, then monetary policy could need to be tightened by a somewhat greater extent over the forecast period than the very gently rising path implied by the market yield curve underlying the May projections.”
Also, some BOE officials reiterated 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.”
The Australian Dollar
The Aussie had a mixed start before getting slapped lower across the board during Tuesday’s Asian session.
And as I noted in Tuesday’s Asian session recap, that was likely due to retail trade turnover in Australia falling by 0.1% month-on-month in March instead of rebounding by 0.3% as expected. Moreover, retail trade turnover for all of Q1 only rose by 0.27% quarter-on-quarter, which is much lower than Q4 2016’s 1.07% increase. Consumer spending will therefore very likely be slower in Q1 2017, which will then likely result in slower GDP growth in Q1.
Fortune finally smiled on the Aussie when Tuesday’s London session rolled around. And as I noted in Tuesday’s London session recap, the Aussie found broad-based support back then, apparently because of the recovery in commodity prices.
And as it turns out, the commodities recovery that started during Tuesday’s London session eventually became a full-blown commodities rally, as you can see below. And the Aussie was apparently tracking the commodities rally higher, given that there wasn’t really much in terms of catalysts for the Aussie dollar during the remainder of the week.
Interestingly enough, iron ore, Australia’s main commodity export, parted ways with the commodities rally on Thursday. And as I noted in Thursday’s Asian session recap, market analysts blamed that on China’s crackdown on Chinese steel mills that fail to pass emission standards.
And as I also noted in the recap and as you can see in the chart above, the renewed slide in iron ore prices also caused the Aussie to initially retreat. However, buyers were waiting to send the Aussie higher again.
Iron ore continued to slide on Friday. This time, however, the Aussie chose to completely ignore iron ore and steadily marched higher instead. Again, no clear reason why other than traders being more focused on the general commodities rally.
Anyhow, the Aussie’s defiance, despite the renewed slide in iron ore prices, allowed the Aussie to end up as this week’s second best-performing currency (for what it’s worth, given the relatively small weekly % changes).
There was another interesting event this week, which may or may not have helped sustain demand for the Aussie. And that was Australia’s annual budget, which was revealed on Tuesday.
And aside from plans for infrastructure spending and other measures to boost growth, as well as a levy on banks, Australian Treasurer Scott Morrison also detailed in his speech the government’s plans for battling Australia’s potential housing bubble that the RBA has been mentioning lately.
And these include:
- Establishment of a “$1 billion National Housing Infrastructure Facility, based on a UK model, to fund ‘micro’ city deals that remove infrastructure impediments to developing new homes.”
- “On the demand side, for those who are trying to save to buy their first home, we will support them by providing a tax cut on their first home deposit savings.”
- Encouraging “older Australians to free up housing stock, by enabling downsizers over the age of 65 to make a non-concessional contribution of up to $300,000 into their superannuation fund from the proceeds of the sale of their principal home.”
- “Even tougher rules on foreign investment in residential real estate will be introduced, removing the main residence capital gains tax exemption, and tightening compliance.”
- Applying “an annual foreign investment levy of at least $5,000 on all future foreign investors who fail to either occupy or lease their property for at least six months each year.”
- Restoring “the requirement that prevents developers from selling more than 50 per cent of new developments to foreign investors.”
In short, discourage foreign demand, support domestic demand, and try to encourage supply.
This may have had the effect of reducing jitters over Australia’s housing market woes, especially since Moody’s gave Australia’s budget a thumbs up by affirming Australia’s AAA rating and Fitch would do the same later.
The Canadian Dollar
The Loonie was the third best-performing currency this week, although that may also depend on your data feed, given that the Loonie only barely lost out against the Aussie.
And like last week, Loonie pairs appear to have been tracking oil prices rather closely this week. And since oil was in positive territory this week (chart for oil is inverted), the Loonie also naturally ended up being a net winner as well.
- U.S. crude oil up (CLG6) by 3.59% to $47.88 per barrel for the week
- Brent crude oil up (LCOH6) by 3.58% to $50.86 per barrel for the week
Oil was actually late to the commodities rally, since it only started climbing on Wednesday, and market analysts linked demand for oil on Wednesday to the unexpected decrease in U.S. oil inventories and optimism that OPEC would be able to extend its oil cut deal.
Having said that, there was a very noticeable divergence between the Loonie and oil during Wednesday’s late U.S. session and Thursday’s Asian session, as marked in the chart above.
As you can see, the Loonie retreated while oil continued to advance. And as I noted in Thursday’s Asian session recap, that divergence was very likely due to the news that Moody’s downgraded its long-term credit ratings on six Canadian banks.
In its press statement, Moody’s said that:
“The banks affected are: Toronto-Dominion Bank, Bank of Montreal, Bank of Nova Scotia, Canadian Imperial Bank of Commerce, National Bank of Canada, and Royal Bank of Canada.”
And Moody’s explained the rationale for the downgrades as follows:
“Today’s downgrade of the Canadian banks reflects our ongoing concerns that expanding levels of private-sector debt could weaken asset quality in the future. Continued growth in Canadian consumer debt and elevated housing prices leaves consumers, and Canadian banks, more vulnerable to downside risks facing the Canadian economy than in the past.” said David Beattie, a Moody’s Senior Vice President.”
In other words, Canada’s housing market problem is becoming even more worrisome, and that likely spooked some Loonie bulls.
The Japanese Yen
The yen was mixed this week, so opposing currency price action likely had a strong influence on yen pairs. Still yen pairs (except CHF/JPY) were still roughly tracking bond yields, although signs of decoupling are becoming ever stronger. This is very clear when bond yields plunged hard because of disappointing U.S. data on Friday, but the yen was reluctant to gain strength and even lost out to some currencies, even as risk aversion dominated and even though there was no direct catalyst for the yen.
And as mentioned earlier when we discussed the Swissy, it was the safe-haven Swissy that benefitted the most when the Greenback surrendered some of its gains and risk aversion hit on Friday. The Swissy even took ground from the yen on Friday, as you probably saw in the overlay of yen pairs earlier.
As to why forex traders seem wary of loading up too heavily on the yen, I already discussed the likely reason in last week’s recap. If you can still recall, I pointed out last week that Japanese Finance Minister Taro Aso’s warned during his May 1 talk at the Milken Institute’s Global Conference that the yen’s status as the premier safe-haven currency may no longer be tenable, given the sabre-rattling between the U.S. and North Korea.
Specifically, Aso warned that: “We should always think about what the yen would be like if something happens in North Korea.” And while “the yen is said to be a safe-haven currency,” the current North Korea situation has made the yen “extremely unstable”.
This week was a rather wonky week for the euro, with the euro having a mixed performance on Monday and Tuesday, then trading roughly sideways on Wednesday and Thursday, and then finally having another mixed performance on Friday. And the end result being a rather funky chart of euro pairs and a mixed performance table.
Needless to say, opposing currencies likely dictated price action on euro pairs. However, the euro did actually show broad-based weakness from Monday to Wednesday. It becomes clearer if we remove EUR/CHF and EUR/JPY. As to why the two pairs were exceptions, the Swissy was super weak at the time while the yen got dragged lower by bond yields, as discussed earlier.
As for the euro’s broad-based weakness from Monday to Wednesday, that may have been due to profit-taking by euro longs who opened preemptive bets on a Macron victory.
After that, the euro’s price action became a total mess on Thursday, but got a broad-based push higher when U.S. bond yields plunged and the Greenback weakened in response to poor U.S. data. This is rather interesting because only the Swissy was able to beat out the euro. Also, it sure makes you wonder how the euro will fare next week, huh? And all the more so now that the latest COT report shows that the Big Boys (and Girls) are now net long on the euro after extensive unwinding by euro shorts.