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?
Only two of the top 10 movers saw weekly % changes above the 1% mark, so trading conditions may have been pretty bad for longer-term traders. That doesn’t mean that intraweek volatility dried up, though, since there was actually decent two-way action that would have kept shorter-term traders happy.
With that said, half of the top 10 movers are Swissy pairs, with the Swissy winning out in all of them. Swissy strength was therefore a main theme this week. Did that surprise you?
The Swiss Franc
The Swissy got its butt kicked during the past two weeks. The tables got turned this week, however, since the Swissy was the one doing all the butt-kicking to end up as this week’s champ. The Swissy’s price action looked very messy, though, as you probably saw above. And filtering out some Swissy pairs doesn’t really yield any uniform price action.
Even so, the Swissy was tracking the euro for the most part. Also Swissy pairs deviated from the euro on two occasions, though, as marked below.
You can also see that the Swissy advanced against the euro during those two occasions by checking out how EUR/CHF’s price action played out.
The weird thing, however, is that there’s nothing during those days. Absolutely nothing. In Monday’s London session recap, for example, I pointed out that the Swissy outperformed even though risk-taking was the dominant sentiment on Monday, which is kinda weird. I did attribute it to safe-haven demand for the Swissy due to Brexit-related uncertainty, but I’m not really sure.
And the same can be said for Thursday, but risk aversion prevailed at the time, so Swissy strength did make some sense at least. And we can’t really point to SNB meddling since the SNB wants to weaken the Swissy, not strengthen it.
Anyhow, whatever caused these weird bouts of strength, they certainly helped to give the Swissy the edge it needed to come out on top this week.
The Australian Dollar
After two weeks of broad-based strength, the Aussie’s strength finally gave out, and the Aussie ended up being this week’s worst-performing currency.
And while the overlay of Aussie pairs above looks kinda chaotic, we can see there was actually uniform price action on the Aussie if we remove GBP/AUD and AUD/CAD, as you can see below.
Iron ore prices climbed on Monday, thanks to higher Chinese steel prices. And steel prices rose, market analysts say, because of lower Chinese steel supply due to the credit crunch in China.
Instead of getting a bullish boost, however, the Aussie got slapped lower. And that was apparently due to the news that Moody’s downgraded the long-term credit rating of Australia’s banks, including the Big Four, namely Australia and New Zealand Banking Group (ANZ), National Australia Bank (NAB), Commonwealth Bank of Australia (CBA), and Westpac Banking Corporation (Westpac).
Moody’s gave the following rationale for the ratings downgrade:
“In Moody’s view, elevated risks within the household sector heighten the sensitivity of Australian banks’ credit profiles to an adverse shock, notwithstanding improvements in their capital and liquidity in recent years.”
“In Moody’s assessment, risks associated with the housing market have risen sharply in recent years. Latent risks in the housing market have been rising in recent years, because significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness.”
Aussie bulls kept chipping away, though, so the Aussie eventually recovered from its losses and even ended up a net winner for the day.
The following day, iron ore took a plunge because Chinese steel prices took hits. And market analysts blamed the side in steel prices on expectations that demand for steel will fall because the rainy season has apparently arrived, as well as signs that the Chinese property market was starting to slow down.
Instead of plunging with iron ore prices, however, the Aussie held steady instead. Heck, it even found buyers later. And the likely reasons for this wonky price action were the RBA’s meeting minutes and Australia’s House Price Index (HPI), which were released simultaneously.
There were no dovish surprises in the minutes. It fact, it was more of a fleshed out version of the RBA’s June press statement. As such, the RBA’s neutral tone was maintained, with optimistic undertones on inflation, growth, and the housing market.
Moreover, the minutes also revealed that the RBA was optimistic on wage growth when it noted the following (emphasis mine):
“The wage price index had increased by 0.5 per cent in the March quarter, suggesting that aggregate wage growth had stabilised at low levels. Wage growth had remained particularly low in the mining sector. Liaison suggested that, while wage growth is likely to remain subdued for some time yet, there had been isolated reports of localised and skills-specific labour shortages feeding into higher wages.”
Going back to the housing market, the RBA reiterated that (emphasis mine):
“Housing prices had been rising briskly in some markets, although there had been some signs that price pressures were starting to ease.”
And as mentioned earlier, Moody’s downgraded the long-term credit rating of Australia’s banks due to “elevated risks within the household sector” because the “significant house price appreciation in the core housing markets of Sydney and Melbourne has led to very high and rising household indebtedness.”
This is where Australia’s HPI comes in, since it printed a 2.2% quarter-on-quarter increase in Q1 2017, which is slower than the 4.4% increase in Q4 2016.
Looking at the details, house prices in Sydney increased by 3.0% (5.2% previous) while house prices in Melbourne rose by 3.1% (5.2% previous). As such, concern over Moody’s downgrade likely eased a bit, allowing the Aussie to appreciate despite the slide in iron ore prices.
Unfortunately for the Aussie, risk aversion finally returned during Tuesday’s European session, as noted in Tuesday’s London session recap. And that, plus the earlier slide in iron ore prices, very likely weighed down on the Aussie.
After that, iron ore prices slid even lower on Wednesday and risk aversion prevailed, so the Aussie took another broad-based hit.
Risk aversion persisted on Thursday, but iron ore prices finally stabilized. And so the Aussie finally got a chance to lick its wounds. As to why iron ore prices finally found a bottom, market analysts attributed that to higher steel prices because of short-term speculative activity. I kid you not. Click the link I provided if you don’t believe me.
Anyhow, iron ore extended its gains a bit on Friday. The Aussie had a more mixed performance on Friday, but many Aussie pairs did follow suit. That wasn’t enough to undo the damage inflicted on Tuesday and Wednesday, though, and so the Ausse ended up as this week’s biggest loser.
The New Zealand Dollar
The Swissy managed to edge out a win against the Kiwi, so the Kiwi was only the second strongest currency this week. Even so, the Kiwi’s strong performance this week means that the Kiwi has been a net winner for five consecutive weeks already.
If we take away the annoying price action from GBP/NZD, then we get this.
As you can see, the Kiwi had a good start, thanks to risk-on vibes at the time and probably because Westpac’s consumer confidence index rose from 111.9 to 113.4 in Q2, which is the best reading in nine quarters.
Bears were waiting in the bushes, though, and they later attacked during the late Asian session. No clear reason why, however, since risk-taking persisted into Monday’s U.S. session. Profit-taking by Kiwi bulls after five consecutive weeks of Kiwi strength is a possibility, though, especially since a dairy auction and the RBNZ statement were coming up.
Speaking of the dairy auction, that didn’t go so well since the GDT price index was down by 0.8% when the auction finally ended. This is the first fall after consecutive increases during the six previous auctions, which is a real bummer and is very likely why bearish pressure was applied on the Kiwi ahead of the RBNZ statement.
When the RBNZ finally released it official press statement, however, the Kiwi reacted by jumping higher and then steadily climbing higher still while ignoring the fact that risk aversion was the name of the game.
Forex Gump has the details on the RBNZ statement, so read his write-up here, if you’re interested. The short of it, though, is that the RBNZ refrained from talking down the Kiwi dollar, even though the Kiwi’s trade-weighted index already exceeded the RBNZ’s own forecasts by a lot.
This heavily implies that the RBNZ thinks the Kiwi still has room to move higher before it would have a negative impact on exports, which likely enticed some bulls to jump in (or scared off some bears).
Other than that, the RBNZ also downplayed New Zealand’s poor Q1 GDP while presenting an optimistic outlook, which likely attracted even more Kiwi bulls.
Anyhow, the Kiwi’s broad-based strength finally faltered during Friday’s U.S. session since the Kiwi’s price action became more mixed. Still, the Kiwi’s gains due to the RBNZ statement were more than enough to wipe out its earlier losses (except on NZD/CHF), and so the Kiwi scored another broad-based win for the fifth consecutive week.
The Pound Sterling
The pound was the second worst-performing currency of week, but the weekly % changes were rather small, so longer-term traders probably ain’t too happy. Short-term traders probably had a very good week, though, since there was decent two-way action on the pound this week.
Anyhow, Brexit and political drama in the U.K. took the back seat this week, as BOE-related news got under the spotlight.
The pound had a mixed start before steadying ahead of BOE Guv’nah Mark Carney’s speech. And when Carney did finally deliver his speech, he said the following (emphasis mine):
“Different members of the MPC will understandably have different views about the outlook and therefore on the potential timing of any Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace.”
“From my perspective, given the mixed signals on consumer spending and business investment, and given the still subdued domestic inflationary pressures, in particular anaemic wage growth, now is not yet the time to begin that adjustment. In the coming months, I would like to see the extent to which weaker consumption growth is offset by other components of demand, whether wages begin to firm, and more generally, how the economy reacts to the prospect of tighter financial conditions and the reality of Brexit negotiations.”
I would just like to point out here that Carney stressed that his dovish view is his own and that other MPC members have their own views. Even so, the market reacted as if Carney spoke for the BOE as a whole and dumped the pound prettty hard.
Fortunately for pound bulls, BOE Chief Economist Andy Haldane gave a speech the following day. And Haldane, who’s a well-known dove, surprised market players when he revealed his hawkish feather while saying that he may defect to the hawkish camp soon if the U.K.’s economy evolves as expected (emphasis mine):
“As the balance point between these risks has shifted over the past 9 months, that has left me judging that a partial withdrawal of the additional policy insurance the MPC put in place last year would be prudent relatively soon, provided the data come in broadly as expected in the period ahead. Certainly, I think such a tightening is likely to be needed well ahead of current market expectations.”
“How soon is ‘relatively soon’? I considered the case for a rate rise at the MPC’s June meeting. I felt then there were strong grounds for holding back until later in the year, for two reasons. First, despite upwards pressure on inflation, there are still few signs of higher wage growth. And despite robust surveys, there is still some chance of a sharper than expected slowing in the economy. Both are reasons for monetary policy not to rush its fences. Nor does it need to do so, given the slow build of nominal pressures in the economy.”
“Second, there is the election. This has thrown up a dust-cloud of uncertainty. Financial markets-wise, that is manifesting itself in a weaker exchange rate. It is unclear what twists and turns lie ahead, with potentially important implications for asset prices and, at least potentially, confidence among businesses and consumers. I do not think adding a twist or a turn from monetary policy would, in this environment, be especially helpful in building confidence, at least until the dust-cloud has started to settle.”
“Provided the data are still on track, I do think that beginning the process of withdrawing some of the incremental stimulus provided last August would be prudent moving into the second half of the year. As and when the MPC begins this process of normalising monetary policy, it will be a sign of the economy itself having begun to normalise. Far from being a cause for concern, starting the process of withdrawing some monetary policy insurance should serve as a signal of the MPC’s confidence in the UK economy’s resilience and in inflation returning sustainably to its 2% target.”
The pound then became mixed after that, but got another bullish infusion during Thursday’s U.S. session, thanks to outgoing MPC Member and Super Hawk Kristin Forbes’ speech, particularly the following statements (emphasis mine):
“Given that UK inflation is now likely to reach 3%, and is forecast to remain above 2% for at least three years (as of the May Inflation Report), this suggests some urgency in tightening monetary policy.”
“This combination of results suggests that, in my view, the ‘lift-off’ of UK interest rates should not be delayed any longer. Many of the factors that have justified keeping interest rates at emergency levels over the past few years have become less potent, and sterling’s depreciation has fundamentally shifted underlying inflation dynamics in a way that makes it more pressing to begin this voyage soon.”
These hawkish statements from Forbes allowed the pound to climb higher before showing finally signs of fatigue near the end of Friday’s London session.
By the way, Brexit and U.K. politics didn’t really have much of an effect on the pound’s price action this week. However, there’s a good chance that they may inject the pound with some volatility next week since Parliament will be voting on the Queen’s Speech next week.
This vote will be seen as litmus test for Theresa May’s minority government. And so far, things don’t look so good since the Conservative Party and the DUP have yet to hammer out a deal.
There was even a rumor this week (courtesy of The Telegraph) that the DUP was supposedly playing hard-ball, demanding (blackmailing?) £2 billion before they would lend the votes of their 10 seats in Parliament so that the Conservative Party retains control of government.
Anyhow, a potentially interesting week for the pound ahead, so make sure to keep an eye on the pound.
The U.S. Dollar
For what it’s worth, the Greenback was the third best-performing currency this week. The messy price action implies that opposing currency price action was in play and that the Greenback probably lucked out.
However, if you remove USD/JPY and USD/CHF, then you can see that there was actually some semblance of uniformity in the Greenback’s price action.
And the trigger for the Greenback’s early rally was apparently New York Fed President William Dudley’s hawkish comments that he’s “very confident” that the U.S. economy can still grow and that “halting the tightening cycle now would imperil the economy”.
The Greenback later found even more buyers when BOE’s Carney gave his dovish speech, very likely because monetary policy divergence came into play, given that the Fed and the BOE are the only two central banks with a clear tightening bias and are capable of tightening soon. And since the market took Carney’s dovish statements as if Carney spoke for the BOE as a whole, that left the Fed as the only hawkish central bank, sending buyers towards the Greenback.
Monetary policy divergence between the BOE and the Fed later got killed when Haldane got a chance to speak and shared his hawkish bias, though.
Incidentally (or not), the Greenback’s broad-based rise ended and price action became mixed after Haldane gave his speech, which implies that monetary policy divergence did drive the Greenback’s price action.
Anyhow, the Greenback started dipping after that. Other than profit-taking, there was no clear reason why, though. Even so, the Greenback’s broad-based gains from Monday to Wednesday was more than enough to ensure that the Greenback would be a net winner this week, although the later dip meant that the Greenback barely dodged a bullet against the euro. Still, a win is a win.
The Canadian Dollar
That overlay of Loonie pairs looks pretty messed up, so let’s remove EUR/CAD and GBP/CAD to have a “cleaner” picture.
Much better right? As you can see in the chart above and the bullet points below, the Loonie got dragged down by another week of slumping oil prices.
- U.S. WTI crude oil down (CLG6) by 3.62% to $43.12 per barrel for the week
- Brent crude oil down (LCOH6) by 3.61% to $45.66 per barrel for the week
And as usual, market analysts were blaming the slide in oil prices on concerns that the glut is here to stay. This week, however, they were pinning the blame specifically on the rise in U.S. oil output, as well as higher oil output from Nigeria and Libya, which are two OPEC members that were exempted from OPEC’s extended oil cut deal.
As marked on the chart, however, there was three instances when the Loonie’s price action clearly diverged from oil prices.
The first happened on Monday. No clear reason for that, although it’s possible that Loonie bulls who were late to the party were trying to extend the Loonie’s gains from the previous week. And if you can still remember, the Loonie defied falling oil prices last week because of BOC Senior Deputy Governor Carolyn Wilkins’ hawkish speech.
The second instance of diverging price action is when the Loonie jumped while oil steadied during Thursday’s U.S. session. And that was apparently due to Canada’s April retail sales report since headline retail sales increased by 0.8% versus the projected 0.3% rise while the core reading came in at 1.5%, which is a significantly better than the expected 0.6% increase. In addition, the increase in sales was broad-based since nine out of the 11 retail store types reported higher sales.
The third and final instance of diverging price action happened during Friday’s U.S. session since the Loonie dropped even as oil prices staged a recovery. And the Loonie’s tumble was due to Canada’s May CPI report since headline CPI only increased by 0.1%, which is slower than the 2-3% consensus. Year-on-year, this translates to a 1.3% rise, which is slower than the expected 1.5% increase and the previous month’s +1.6%
Moreover, two of the BOC’s preferred measures for the core reading took even more hits, with the trimmed mean CPI ticking lower from +1.3% to +1.2% and the weighted median CPI slowing from +1.6% to +1.5%.
Those number obviously don’t bode to well for rate hike expectations. Even so, there was no follow-though selling, probably because recovering oil prices provided support.
If you’re getting a headache while looking at the chaotic chart above, then I can’t blame ya. Anyhow, the euro’s price action was a complete mess for the second week running since there wasn’t really much in terms of market-moving news or economic reports for the euro. As such, the euro fell victim to opposing currency price action.
Well, we did get the Euro Zone’s PMI readings on Friday, but the euro barely budged on that, probably because the readings were mixed, with the flash manufacturing PMI for the month of June improving further from 57.0 to a 74-month high of 57.3 while the flash services PMI reading dropped hard from 56.3 to a five-month low of 54.7.
Other than that, there was news late on Friday that the ECB ordered two embattled Italian banks to be wound up, namely Veneto Banca and Banca Popolare di Vicenza.
There was also news about Moody’s upgraded Greece’s credit rating to Caa2 (which is still pretty horrible) while also upgrading its outlook to stable, with signs of a stabilizing economy being cited.
Both news came out very late into the session, though, so the euro probably didn’t have time to fully react. I guess we’ll know come Monday.
The Japanese Yen
The yen had a mixed performance this week, so opposing currency price action was in play. The yen’s price action was still roughly tracking bond yields (as usual), though.
With that said, the yen was a net loser on Monday since bond yields surged after New York Fed President William Dudley gave his hawkish speech, market analysts say.
Bond yields went back down on Tuesday, so the yen rebounded. Market analysts pointed mainly to wavering faith that the Fed can pull off another hike amid deteriorating inflation indicators. However, I would just add that risk aversion made a comeback on Tuesday, so the yen’s strength and the lower bond yields may have been due to that as well.
After that, bond yields moved mostly sideways from Wednesday to Thursday, so the yen moved somewhat sideways as well, although it is at this time that opposing currencies apparently took advantage of the yen or got taken advantage of by the yen.
Bond yields later began tilting higher on Friday, though, and so the yen experienced weakness again, although the yen’s price action became more mixed near the end when bond yields dipped again.