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?
Half of the top ten movers are pound pairs, with the pound showing weakness in all of ‘em. That’s pretty much a given already, though. And from the table of top 10 movers, and as you’ll see in more detail later, the Aussie and the Kiwi were the ones doing most of the smacking.
The Pound Sterling
The pound was the worst-performing currency this week and almost everybody (probably) already knows why.
But if you don’t know why (for some strange reason), then just know that the pound’s weakness was all thanks to the the U.K. general elections, as you probably saw in the chart earlier.
Forex Gump has the details here, so read up on that if you want. The short of it is that Theresa May’s Conservative Party was in the lead but failed to capture the 326 seats (out of 650) needed to have a majority in Parliament, resulting in a so called “hung Parliament.”
The implications for this are less stability in government and difficulty in pushing through with Theresa May’s plans, particularly with regard to Brexit. As such, pound bears attacked while pound bulls got spooked, particularly those bulls who were expecting that the Conservative Party would either capture even more seats or at least retain the 330 seats it had before the elections.
As for some election-related updates, Theresa May announced in her post-election speech on Friday that she plans to strike a deal with the Democratic Unionist Party (DUP), a party based in Northern Ireland that is against a so-called “hard” Brexit.
This move is apparently meant to ease Brexit-related jitters. And word on the wire is that she plans to form a formal coalition rather than a minority government. After all, the 318 seats that the Conservatives are expected to have, plus the 10 seats for the DUP, would be enough to have some control in Parliament.
— Robert Peston (@Peston) June 10, 2017
If that’s true, then that will likely ease concern over government stability as well. The fact still remains that this was a major disappointment, though.
The Australian Dollar
The Aussie was the second worst-performing currency last week, but it had a good showing this week since it was able to eke out a win against the Kiwi to emerge as the top dog this week.
What makes the Aussie’s strong performance even more impressive is the fact that iron ore (black line chart) was in the dumps this week, as you probably saw earlier.
Anyhow, the Aussie got buyers across the board right from the get-go. Linking the economic reports released at the time to price action, it looks like the main drivers were the Melbourne Institute’s inflation gauge and the inventory report from the Australian Bureau of Statistics.
The monthly readings for the inflation gauge were actually a bit disappointing, with the headline reading flat (+0.5% previous) and the core reading up only by 0.1% (+0.3% previous). However, the year-on-year readings look a tad more upbeat, with the headline reading printing a faster 2.8% increase (+2.6% previous) and the core also posting a faster 2.1% increase (+1.7% previous).
As for the inventory report, it showed a seasonally-adjusted 1.2% quarter-on-quarter increase in Q1 2017, which is more than the expected 0.5% as well as bigger than the 0.3% increase reported in Q4 2016. This is great because it would likely boost Q1 2017 GDP growth and may also be a sign of improving business conditions.
Some market analysts also pointed to the spat between Qatar and its neighbors as the driver for the Aussie. However, news that Saudi Arabia cut ties with Qatar broke out after the Aussie already began to bust the moves, with other countries following suit in the hours that followed.
And as you can see below, natural gas actually plunged hard initially while the Aussie happily climbed higher, which disproves that theory.
Oh, for those who don’t know, Qatar supplies about a third of global liquefied natural gas, according to a Reuters report. And it just so happens that natural gas is Australia’s third major export after iron ore and coal, according to official data from the Australian Department of Foreign Affairs and Trade. So the theory that the Qatar situation is good for the Aussie does make theoretical sense, although price action does not support that theory.
However, it is possible that the Aussie began to track natural gas prices higher starting on Tuesday. Although that’s a bit difficult to say since natural gas prices began to rise at roughly the same time as the RBA statement.
Speaking of the RBA statement, the RBA kept rates on hold yet again. And while the RBA’s tone was neutral overall, it did have noticeably optimistic undertones, particularly with regard to growth, inflation, and the housing market.
To be more specific, the RBA said that housing prices “have been rising briskly in some markets, although there are some signs that these conditions are starting to ease.” Also, “Inflation is expected to increase gradually as the economy strengthens.” Unfortunately, “Slow growth in real wages is restraining growth in household consumption.”
Even so, “the transition to lower levels of mining investment following the mining investment boom is almost complete”. As such, “economic growth is still expected to increase gradually over the next couple of years to a little above 3 per cent.” Although the RBA also warned that GDP growth likely slowed in Q1.
And on that note, GDP growth did slow in Q1 2017, expanding only by 0.3% quarter-on-quarter (+1.1% in Q4) and 1.7% year-on-year (+2.4% previous). However, both the quarterly and annual readings managed to beat their respective consensus readings of +0.2% and +1.5%. And that is likely why the Aussie jumped higher. Natural gas prices were also jumping at the time, though, so that may have helped the Aussie as well.
That was the last hurrah from Aussie bulls, however, since the Aussie’s price action became mixed when Wednesday’s U.S. session rolled around. There’s no clear reason why, but it’s highly likely that falling natural gas prices at the time and the steady decline in iron ore prices finally took their toll on the Aussie.
Also worth noting is that iron ore and natural gas appear to be fighting for the Aussie’s attention, at least when you look at AUD/NZD. Another observation is that iron ore seems to have won out by Wednesday, but the Aussie’s fall was cushioned by the recovery in natural gas prices on Thursday, resulting in the Aussie’s mixed price action. Makes you wonder if natural gas prices will continue to influence the Aussie’s price action next week, huh?
The New Zealand Dollar
The Kiwi showed broad-based strength for the third consecutive week and ended up as the second best-performing currency of the week.
The Kiwi had a mixed start before getting a broad-based boost on Tuesday (except on AUD/NZD). And the trigger for that was apparently ANZ’s commodity price index since the headline reading printed a 3.2% month-on-month increase in May, with dairy prices increasing by 3.8% (also, there wasn’t really any other catalyst).
However, it’s also possible that the Kiwi’s usual pattern of moving ahead of the dairy auction later that day was the culprit since the Kiwi only nudged higher across the board when the GDT price index printed a 0.6% increase after the dairy auction. In fact, the Kiwi began dipping after that, very likely because of profit-taking after the auction.
The Kiwi then had a mixed performance on Wednesday, but was mostly higher, probably because of the risk-on vibes, as noted in Wednesday’s London session recap.
The Kiwi then got bid even higher on Thursday. And this time demand was broad-based, causing the Kiwi to end up as the top dog of the day. No clear reason why, but risk-taking did persist at the time, as noted in Thursday’s London session recap, and that may have sustained demand for the Kiwi.
Finally, the Kiwi ended the week with a steady performance on Friday. The Kiwi was slightly but broadly higher for the day, though, likely because risk appetite was still the dominant sentiment on Friday.
The Canadian Dollar
The Loonie was the third best-performing currency of the week. And interestingly enough, oil bled out this week, thanks to concerns that OPEC’s extended oil cut deal is not enough to end the glut, market analysts say.
- U.S. WTI crude oil down (CLG6) by 3.67% to $45.91 per barrel for the week
- Brent crude oil down (LCOH6) by 3.42% to $48.24 per barrel for the week
And based on how price action on the Loonie played out, it looks like the Loonie was tracking oil prices for the most part. However, opposing currency price action was also into play. And this can be clearly seen on Thursday when the Loonie started to take ground against the euro, the Swissy, and after the exit polls for the U.K. elections came out, the pound.
And the final piece was Canada’s really upbeat jobs report, which caused the Loonie to jump higher across the board and allowed the Loonie to steal a win from the Greenback.
As for some specifics, the Canadian economy was able to generate 54.5K jobs in May. That’s significantly more than the estimated for a +11.0K to +15.0K increase. Moreover, the increase in jobs was due to full-time employment surging by 77.0K while being partially offset by the 22.3K decrease in part-time jobs.
And while the jobless rate deteriorated from 6.5% to 6.6%, that was expected and partially due to the participation rate jumping from 65.6% to 65.8%.
The only really disappointing thing about the jobs report was that average hourly earnings fell by 0.77% month-on-month to $25.88, which marks the second month of falling wages. And that’s probably why there was little follow-through buying. But then again, the jobs report only very rarely triggers follow-through buying (and selling), which is why Forex Gump advised y’all to only pillage some pips in his Event Preview for Canada’s Jobs Report.
The euro had a bad run this week. And while the overlay of euro pairs looks kinda chaotic, it becomes more comprehensible if you remove EUR/GBP and EUR/CHF.
As to why the euro got whupped this week, well, that’s mostly due to ECB-related events, as we’ll discuss in a bit. However, opposing currency price action was also likely in play since the euro was range-bound for the most part, but showed early weakness against the yen, the Aussie, and the Kiwi, which had their own respective catalysts.
The euro finally found trouble on Wednesday, though, thanks (or no thanks) to a Bloomberg report that cited unnamed sources as saying that the ECB is “preparing to cut its inflation outlook across its forecast horizon at this week’s policy meeting because of weaker energy prices.”
According to these unnamed sources, the “ECB’s draft projections now show consumer-price growth at roughly around 1.5 percent each year in 2017, 2018 and 2019.”
Also according to these unnamed sources, “predictions for economic growth are likely to be revised up by about a tenth of a percentage point.”
As such, the euro initially reacted by plunging lower when traders read that the ECB will supposedly cut its inflation outlook, since that supports the idea that the ECB ain’t gonna budge from its current monetary policy anytime soon. However, the alleged upgrade to GDP growth projections was apparently taken by bulls as a signal to try and charge in, so the euro recouped some of its losses.
And when the ECB statement did roll around, the ECB removed the phrase “or lower levels” in referring to interest rates, which implies that the ECB no longer has an easing bias, at least with regard to interest rates. The euro therefore tried to jump higher as a result.
Also, the minutes of the April ECB meeting had this to say.
“Looking ahead, it was suggested that, if the euro area recovery kept up its momentum and progress was made in attaining a sustained adjustment in the path of inflation, due consideration would need to be given to adjusting the present formulation of the Governing Council’s forward guidance.”
It’s therefore not really all that surprising that the would-be euro rally got snuffed almost right away.
As for the ECB presser, it confirmed the Bloomberg report because inflation forecasts did get downgraded while GDP projections did get a boost.
Here are the relevant parts (emphasis mine)
“This assessment is also broadly reflected in the June 2017 Eurosystem staff macroeconomic projections for the euro area, which foresee annual HICP inflation at 1.5% in 2017, 1.3% in 2018 and 1.6% in 2019. By comparison with the March 2017 ECB staff macroeconomic projections, the outlook for headline HICP inflation has been revised downwards, mainly reflecting lower oil prices.”
“These projections foresee annual real GDP increasing by 1.9% in 2017, by 1.8% in 2018 and by 1.7% in 2019. Compared with the March 2017 ECB staff macroeconomic projections, the outlook for real GDP growth has been revised upwards over the projection horizon.”
Other noteworthy things from the ECB presser is that (1) tapering the ECB’s QE program was not discussed at all and that (2) the ECB clearly still has an easing bias with regard to its QE program, (3) and that the ECB is ready and willing to return its easing bias on interest rates if needed.
Here’s what ECB Overlord Draghi had to say on the ECB’s QE program and readiness to return its easing bias on interest rates (emphasis mine):
“The other point was about why we left the other bias, the APP [asset purchase program or QE program] bias, easing bias. Well, first of all, the two are very different. The first is an expectation that interest rates will remain at present or lower levels. Now, if you ask me now, ‘What do you expect?’ I would say that based on a current assessment, current information, I don’t expect lower interest rates. If you ask me, ‘But in case things were to worsen, are you ready to lower interest rates?’ the answer is yes. So the APP easing bias is like this. It’s part of a reaction function and it does say that if things were to turn less favourable – and here, just stop a moment: if things were to turn less favourable, it’s a set of contingencies which is more benign than the tail-risk contingency embodied in the expectation on rates, and as such it’s still there. So it’s part of our reaction function. If things turn out to be less favourable we are ready to expand our APP. That’s the answer.”
Given all that, it’s no real wonder why the euro started to bleed out against most pairs, except against the pound of course.
The Swiss Franc
The Swissy was last week’s champ, but it got dethroned and ended up as this week’s third worst-performing currency.
And as usual, the Swissy and euro were dancing mostly in tandem, as you can see below.
And since the euro got whupped this week, it’s also somewhat natural that the Swissy got its butt kicked as well.
Also, I may just be imagining it, but it’s possible that the sneaky SNB was weakening the Swissy by buying up the euro.
And looking at EUR/CHF, that does appear to be the case. EUR/CHF, for example, began to tank ahead of the ECB statement. But during the ECB statement and the ECB presser, EUR/CHF found support and even got bid up for some reason. Also, EUR/CHF found support instead of moving lower when the exit polls for the U.K. elections began to hint at a hung Parliament. Anyhow, suspicious price action indeed.
The Japanese Yen
The yen was mixed for the week (yet again), thanks to the two-way action on bond yields and opposing currency price action.
Anyhow, the yen had a steady start even as bond yields climbed on Monday. However, the yen did get a boost on Tuesday when bond yields plunged, thanks to geopolitical risks, with the spat between Qatar and its neighbors, the U.K. elections, and Ex-FBI Director Comey’s testimony all in focus. Also, rumors that China may be planning to buy more U.S. bonds apparently helped to push bond yields down.
Bond yields then surged on Wednesday, especially during the U.S. session. And that was thanks to Ex-FBI Director Comey’s prepared testimony since parts of Comey’s statement appeared to directly contradict the mainstream media’s Trump-Russia Connection Conspiracy Theory, which eased fears that Trump may get impeached.
Instead of weakening, however, the yen’s price action was mixed. And it is here that we can see opposing price action in play, with the yen holding steady against the euro, the Swissy, and the Loonie, which were weak at the time.
In fact, Wednesday is the day in which the yen became fated to have a mixed performance for the week, except on the pound, since that day was on Thursday.
The U.S. Dollar
The Greenback had a very mixed performance this week, with lots of diverging price action. As such, opposing currencies very likely dictated price action on Greenback pairs.
The only really noteworthy event for the Greenback was the Ex-FBI Director James Comey’s Comey’s prepared testimony and grilling Senate Intelligence Committee since Comey’s testimony was largely seen as dashing hopes (for now) of a Trump impeachment related to the Trump-Russia Conspiracy theory.
Even so, the Greenback’s reaction was muted and mixed. Maybe that’s a sign that the market is tired of all this conspiracy stuff, or maybe the market is just hunkering down ahead of next week’s FOMC statement.