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 pound got whupped hard this week while the Kiwi just shrugged off the commodities rout and prevalence of risk aversion to emerge as the one currency to rule them all this week. So, what was driving forex price action? And how did the other currencies fare?
The Pound Sterling
I noted in last week’s recap, that it was very, very interesting that the positive top-tier economic reports from the U.K. all failed to send the pound broadly higher because there were pound bears who were hidden in the bushes that kept selling into any and all pound rallies.
And this week, pound bears had a great feast, apparently because pound bulls finally gave up the fight and ran with their tail between their legs.
Pound bulls found trouble right from the get-go since pound pairs gapped broadly lower when the new trading week started. And that was thanks to renewed Brexit jitters after Brexit Secretary David Davis delivered the following statements/threats in a Sunday Times Interview.
“We don’t need to just look like we can walk away, we need to be able to walk away.”
“Under the circumstances, if that were necessary, we would be in a position to do it.”
These statements/threats were made in the context of the E.U.’s demands that the U.K. pay up its obligations first before it can be allowed to leave the Union.
Aside from that, Brexit polls over the weekend also showed that Theresa May’s Conservative Party’s comfortable lead has shrunk to not-so-comfortable levels, as Labour began to close the gap. This obviously also weighed down on the pound since many traders have been betting on a sweeping Conservative Party victory.
Westminster voting intention:
CON: 43% (-5)
LAB: 34% (+4)
LDEM: 8% (-)
UKIP: 4% (-)
(via @Survation / 19 – 20 May)
— Britain Elects (@britainelects) May 21, 2017
The pound found even more sellers in the wake of Manchester bombing, although the pound would find support later on the same day, probably because of relief buying, which is kind of tasteless but that’s just how it is.
The pound then traded mostly sideways after that before encountering fresh sellers when the second estimate for the U.K.’s Q1 GDP was released. You see, Q1 GDP growth was downgraded from 0.3% to 0.2%, which is much slower than Q4 2016’s +0.7% and is the weakest reading in four quarters to boot. Year-on-year, this translates to a 2.0% rate of expansion, which is a tick lower than the original +2.1%.
And looking at the details of the GDP report, perhaps the most distressing part is that net trade was the major drag on quarterly growth, thanks to exports slumping by 1.6% while imports jumped by 2.7%. And remember, Kristin Forbes voted for a rate hike during the March BOE statement because she believes that:
“Although consumer spending appeared to be softening, as expected, growth was likely to be supported by other components of demand, such as net exports.”
And in the May BOE statement, Forbes voted for a rate hike again because:
“This member felt that the initial estimate of Q1 GDP growth exaggerated the extent of the slowdown.”
Since exports actually plunged and GDP growth was actually weaker than initially estimated, that likely made many traders think that Forbes ain’t gonna be as hawkish in the June BOE statement.
Moving on, things only got worse for the pound when YouGov released a poll showing that Theresa May’s lead against Labour narrowed further to a nail-biting 5 points. After that, it was just downhill from there, even though there were no fresh catalysts for the pound.
Westminster voting intention:
CON: 43% (-1)
LAB: 38% (+3)
LDEM: 10% (+1)
UKIP: 4% (+1)
(via @YouGov / 24 – 25 May)
— Britain Elects (@britainelects) May 25, 2017
The New Zealand Dollar
After being a net loser for a couple of weeks, the Kiwi finally emerged triumphant this week. And as you can see in the overlay of Kiwi pairs above, most Kiwi pairs captured the bulk of their gains on Monday and Tuesday, which is rather strange because there were no economic reports for New Zealand back then.
Some market analysts attributed the Kiwi’s strength to Fonterra’s report and New Zealand’s upbeat trade report. But as you probably saw in the chart above, those reports came out AFTER the Kiwi made its bullish move. However, it’s certainly possible that forex traders may have been opening preemptive bets ahead of those reports since the Kiwi trampled the Aussie right from the start.
Also, it’s possible that some Kiwi bears were taking some profits off the table after two weeks of broad-based Kiwi weakness, especially since there was a commodities rally on Monday and risk-taking prevailed on Monday and even on Tuesday (despite the Manchester bombing), as noted in my session recaps.
And while the Fonterra report and New Zealand’s trade report didn’t appear to have much of an effect on the Kiwi’s price action, it’s probable that those two reports helped to shield the Kiwi from being dragged down by Moody’s China downgrade and the commodities slide that started during Tuesday’s morning London session.
As for some specifics, Fonterra upgraded this season’s farmgate milk prices by 15 cents to $6.15 per kilo. According to analysis by the Bank of New Zealand, this season’s payout rate “is well above average breakeven estimates, which are in the low $5s, and a far cry from the prior season’s milk price of $3.90.” This is obviously good news for New Zealand’s dairy farmers and New Zealand’s overall economy for that matter, given that dairy products make up the bulk of New Zealand’s exports.
Moreover, Fonterra also gave a forecast of $6.50 for the next season’s milk prices, which implies that Fonterra thinks that the dairy market will continue to improve, or that dairy prices will continue to firm at least.
Moving on to New Zealand’s trade report for April, the report showed that New Zealand’s trade surplus widened to $578 million. This is the largest trade surplus since March 2015 and marks the second consecutive month of surpluses after eight straight months of deficits. And it’s a healthy increase to boot since exports rose by 3.15% month-on-month to a 25-month high of $4,750 million, with dairy exports leading the way.
Anyhow, the Kiwi got a final bullish boost starting on Thursday’s U.S. session, probably because of the U.S. equities rally. Although it’s also possible that the bullish boost may have been a delayed reaction to New Zealand’s annual budget since the new budget includes several fiscal measures, such as tweaks to New Zealand’s two lowest tax brackets so that there’s a “tax reduction of $11 a week to anyone earning more than $22,000 per year, increasing to $20 a week for anyone earning more than $52,000 per year.” This is meant to boost consumer spending.
Also, “Treasury forecasts annual economic growth to average over 3 per cent for the next five years, peaking at around 3.8 per cent in 2019.” This is mostly in-line with the RBNZ’s projections, although the 3.8% forecast is a tad faster than the RBNZ’s 3.4% forecast.
Moving on, things got a bit wonky on Friday because the Kiwi’s strength was sustained but, as noted in Friday’s morning London session recap, risk aversion was the dominant sentiment at the time while commodities got another beating, although commodities did stage a comeback during the U.S. session, though. Even so, that doesn’t really explain the Kiwi’s strength during the earlier Asian and European sessions.
Anyhow, this final bullish boost, the Kiwi’s resilience despite the risk-aversion and commodities rout, and the major bullish boost at the start of the week ensured that the Kiwi would emerge as this week’s champ.
The Other Currencies
The Canadian Dollar
Oil got hit hard this week, although not enough to wipe out the gains from last week’s surge, which heavily implies that oil’s weakness after OPEC announced a nine-month extension to its oil cut deal was due to profit-taking, especially since OPEC failed to surprise the market.
- U.S. crude oil down (CLG6) by 2.43% to $49.87 per barrel for the week
- Brent crude oil down (LCOH6) by 2.05% to $52.51 per barrel for the week
If you can still recall, the Loonie failed to track oil prices and reach for the stars when oil soared last week. Well, that wonky price action happened yet again this week because the Loonie very grudgingly took a step back when oil plunged hard on Thursday.
Moreover, it looks like most Loonie pairs were not even tracking oil prices at all. Just compare oil’s price action action to that of the Loonie’s from Monday to Wednesday, as well as on Friday.
As to why the Loonie appears reluctant to track oil prices either to the upside or downside (for the second week running), that’s still a bit of a mystery that no market analyst has apparently noticed. And if they do notice, they’re not really talking about it.
Anyhow, the Loonie’s reluctance to track oil prices lower this week actually worked to the Loonie’s advantage since most Loonie pairs got jolted higher when the BOC statement came out. And this bullish kick allowed the Loonie to end up as the second best-performing currency of the week.
Loonie bulls probably ain’t very happy campers, though, since the weekly percentage changes aren’t really that impressive, except on GBP/CAD of course, but that was due to pound weakness rather than Loonie strength.
Going back to the BOC statement, Forex Gump has a write-up on that, so read the details here, if you’re interested. But if you’re not interested, then the short of it is that expectations were high that the BOC would sound a bit more worried, particularly with regard to inflation and wage growth.
However, the BOC sounded really neutral and remained somewhat optimistic on growth. Also, the BOC just pointed out the weakness in inflation in a matter-of-fact manner without any hint of worry whatsoever. And so the Loonie jumped higher across the board as a result, although follow-through buying was limited and the Loonie’s price action quickly became mixed after that.
The euro is the second worst-performing currency this week, but a quick glance at the table above shows that the euro’s losses were heaviest against the mighty Kiwi and not-as-mighty Loonie. Also, one look at the chart above and you can see that the euro’s price action was a mess.
If we remove EUR/GBP and EUR/NZD, we get this – a still messy chart, although it does show that most euro pairs were trading roughly sideways. Also it gives us a somewhat clearer picture as to why the euro ended up being a net loser this week.
Things looked promising enough when the euro started to spurt higher across the board during Monday’s morning London session, either because traders tried to continue last week’s themes or the market was reacting to Merkel’s statement that:
“The euro is too weak — that’s because of ECB policy — and so German products are cheap in relative terms.”
However, it’s possible that demand for the euro was also due to preemptive buying ahead of Tuesday’s data because the euro initially jumped higher on the positive data only to turn around and take a plunge later.
As for some specifics on these economic reports, here’s my commentary from Tuesday’s London session recap.
The Euro Zone got a bunch of mostly positive soft data earlier. And noteworthy among these was IFO’s German business climate index in May, since it came in at 114.6, which is significantly better than the expected 113.1, as well as the previous month’s 113.0 reading.
According to commentary from IFO, the 114.6 reading is “the highest figure on record since 1991.” Moreover, “This development in the ifo index combined with other key economic indicators, points to economic growth of 0.6 percent in the second quarter.”
Markit’s PMI report for the Euro Zone is noteworthy as well, even though the readings for the service and manufacturing sectors were mixed.
According to Markit, the flash services PMI reading for the Euro Zone as a whole came in at 56.2 in May. This is a two-month low and missed expectations that the reading will nudge higher from 56.4 to 56.5.
The flash manufacturing PMI for the Euro Zone, meanwhile, improved from 56.7 to 57.0, beating expectations that it would deteriorate to 56.5. Even better, the current reading is a 73-month high. And commentary from Markit attributed the improved reading to “exports rising at the steepest rate since April 2011.”
After sliding lower, the euro’s price action became a mess on Wednesday, although the euro did find a few sellers when ECB Overlord Draghi gave a speech, likely because Draghi reminded the market that there were still problem areas in the Euro Zone (emphasis mine):
“Our current assessment is that there is no widespread emergence of imbalances, but there remain some localised areas that require continued close monitoring and vigilance.”
Also, Draghi reiterated that the ECB is in no hurry to tighten, which may have scared away some traders who are speculating on a tightening move from the ECB.
“Our current assessment of the side effects [of the ECB’s monetary policy] suggest therefore that there is no reason to deviate from the indications we have been consistently providing in the introductory statement to our press conferences.”
Buyers would return later, though, although there were no apparent catalysts for that other than Draghi repeating his upbeat assessment and outlook for the Euro Zone economy during his speech.
The euro’s price action then became a mess on Thursday before showing uniform weakness on Friday, very likely because of renewed worries over Italy’s banks, namely Popolare di Vicenza and Veneto Banca. In fact, the slide in European equities on Friday was partially being blamed on these renewed jitters over Italy’s banks.
Anyhow, most euro pairs were roughly range-bound for the week, but the broad-based weakness on Tuesday and Friday meant that the euro ended up being a net loser.
The Swiss Franc
As I’ve been saying in the past few weeks and as shown by Forex Gump in a more well-researched write-up that you can read here, the Swissy appears to be dancing in tandem with the euro recently. And that still appears to be the case this week, as you can see below.
However, the Swissy did manage to edge out a win against the euro. And looking at EUR/CHF below, we can see that the euro initially had the advantage on Monday and the Swissy was just tracking the euro higher since the Swissy also jumped broadly higher on Monday despite the lack of catalysts.
However, the tide of battle swung in favor of the Swissy come Tuesday when the euro weakened across the board. And it was just downhill for the euro from there. Also worth noting is that the Swissy usually took ground from the euro during the London session, so the prevalence of risk aversion in Europe this week likely gave the Swissy the edge it needed to win out against the euro.
The Australian Dollar
The Aussie’s price action looks messy at first, but if you take away AUD/NZD and GBP/AUD, then you get this.
Like the Kiwi, the Aussie had a mostly strong start, likely because of the risk-on vibes and commodities rally that I already mentioned when we discussed the Kiwi. But unlike the Kiwi, the Aussie didn’t really have any positive economic reports to shield it, so it got slapped broadly lower when news hit the wires that Moody’s downgraded China.
Strangely, however, the Aussie later got a bullish boost during the European session. And as I noted in Wednesday’s morning London session recap, this was rather strange because risk aversion prevailed at the time and commodities were mostly lower to boot, including iron ore. The Kiwi had positive catalysts going for it at least while the Aussie had nothing. Again, a rather wonky day for the Aussie.
Price action made sense again come Thursday since the Aussie got slammed across the board by the risk off vibes and another commodities selloff, which included iron ore yet again.
The Aussie’s weakness persisted until Friday, although the Aussie did recover on some pairs later when commodities staged a recovery as well. Still, the damage was done and so the Aussie was a net loser this week.
The U.S. Dollar
The Greenback was a net winner this week, although that’s probably just a fluke since the pound, the euro, and the Swissy were having a hard time. And the same can be said of the Aussie. And against the yen, the Greenback barely eked out a win. Also, many Greenback pairs were actually trading sideways for the week, with the exception of USD/CAD, GBP/USD, and NZD/USD. And those were almost certainly being influenced more by opposing currency price action.
There were two instances of roughly uniform price action, though. The first was when the Greenback strengthened on Tuesday until Wednesday’s Asian session. And that was apparently due to investors shedding their bond holdings in favor of equities and because investors wanted to make room in their portfolios since there was a sale of U.S. 2-year bonds, market analysts say.
As for the second instance of uniform price action, that was apparently as a reaction to the FOMC minutes. You can go ahead and read Forex Gump’s write-up on that here. The gist of it all, though, is that the minutes were not enough to improve odds for a June rate hike, but the revelation that Fed officials were exploring ways to trim their balance sheet and “expressed a favorable view” on the “operational approach” proposed by the FOMC staff led to lower expectations for two more hikes by the end of the year, which weighed down on the Greenback.
The Japanese Yen
The yen was mixed for the week. And removing NZD/JPY and GBP/JPY, we can see that yen pairs were still roughly tracking bond yields, albeit not as beautifully as last week. Also, there’s a clear decoupling during Wednesday’s U.S. session.
According to market analysts, bond yields initially rose because of lower safe-haven demand for bonds due to risk-taking early on and investors were shedding some of their bond holdings to make room for U.S. 2-year bonds. However, bond yields would plunge later on Wednesday due to the FOMC meeting minutes, market analysts say. Even so, the yen did not strengthen across the board. And that was probably due to renewed worries over the yen’s safe-haven status because there were reports floating about that Trump supposedly sent two U.S. subs to the Korean Peninsula and they just happen to be armed with nukes.
After that, the yen had a mixed performance on Thursday, although there’s no clear reason for that other than bond yields were moving sideways so opposing currencies took advantage of the yen. Things did go back to normal on Friday, though, with bond yields falling on month-end buying, market analysts say, and the yen gaining strength as a result.
In the end, this two-way action on bond yields and opposing currency price action resulted in the yen’s mixed performance this week.