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 yen had a really bad run this week since six out of the top 10 movers are yen pairs, with the yen losing out in all of ’em. The pound, meanwhile, emerged triumphant after winning out against the euro and the Loonie.
The Pound Sterling
After last week’s poor performance, the pound edged out the mighty Loonie to emerge as the one currency to rule them all this week.
And pound bulls can sing their praises to BOE Guv’nah Mark Carney since his comments during a panel discussion at the ECB’s Annual Forum on Central Banking apparently caused the pound to jump higher across the board.
Here is what Carney had to say (emphasis mine):
“As spare capacity erodes … the trade-off [between stabilising inflation and supporting growth and employment] that we must balance lessens. And all else equal, our tolerance for above-average inflation falls. Now, different members of the MPC will have different views about the outlook for the economy and where exactly that trade-off will be … so they have different views on the timing of a Bank Rate increase. But all expect that any changes would be limited in scope and gradual in pace.”
“Now, some removal of monetary policy stimulus is likely to become necessary if that trade-off that the MPC faces continues to lessen … because as it lessens, the policy decision becomes more conventional.”
“The extent to which the trade-off moves in that direction will depend on the extent to which weaker consumption growth is offset by other components of demand including business investment, whether wages and unit labour costs begin to firm, and more generally, how the economy reacts to both tighter financial conditions and the reality of Brexit negotiations. These are some of the issues that the MPC will debate in the coming months.”
None of what Carney said was actually new. In fact, much of what he said this week was a word-for-word copy of what he said last week. And as Forex Gump and I have pointed out, Carney’s dovish tone last week was based on his personal views and did not reflect the views of other BOE MPC members.
Moreover, Forex Gump pointed out in last week’s roundup of central bank biases (read it here) that “Carney is dovish in that he personally doesn’t want to support hikes just yet. However, Carney is still a hawk in that the next move he’s contemplating is to hike.”
Anyhow, the part where Carney said that “some removal of monetary policy stimulus is likely to become necessary” was apparently taken as a hawkish sign, even though it contained Carney’s usual caveats that a rate hike is conditional and no timeline was given other than the vague statement that “the MPC will debate in the coming months.”
What’s unmistakably clear here, however, is that Carney was speaking for the BOE as a whole, so his hawkish statement heavily implied what many (if not most) MPC members are thinking, even though Carney revealed last week that he is personally not yet sold on voting for a rate hike.
Moving on, there were also developments related to U.K. politics and Brexit, namely the successful deal between the Conservatives and the DUP. And this deal was successfully tested when the Queen’s Speech got passed by a majority of only 14 votes.
These positive developments didn’t really have much of a direct impact on the pound’s price action, however. Although the Conservative-DUP deal, which was announced on Monday, probably opened the gates for pound bulls to charge in when Carney gave his speech. The successful vote on the Queen’s Speech, meanwhile, likely enticed follow-through buyers to sustain the pound’s strength on Thursday.
Also, the pound dipped only to climb back up again on Friday. The dip coincided with the release of the final estimate for the U.K.’s Q1 GDP growth since there were some rather disappointing details with regard to consumer spending and household incomes.
But as I noted in Friday’s London session recap, the BOE has been warning that consumer spending and household incomes would be taking hits, so I conjectured that maybe pound bulls were using the GDP report to unwind trades. And that did appear to be the case since the pound later snapped back up without any apparent catalysts.
The Japanese Yen
The yen got whupped pretty hard this week, thanks (or no thanks) to the global bond selloff that caused bond yields to surge super hard.
Interestingly enough, risk aversion was actually the more prevalent sentiment in the global equities market, and yet the yen fell and bond yields surged.
- Nikkei 225 (N225) closed 0.49% lower to 20,033.43 for the week
- Shanghai Composite (SSEC) closed 1.09% higher to 3,192.43 for the week
- Hang Seng (HSI) closed 0.37% higher to 25,764.58 for the week
- The Euro Stoxx 50 (STOXX50E) closed 2.90% lower to 3,440.86 for the week
- The FTSE 100 (FTSE) closed 1.50% lower to 7,312.72 for the week
- The DAX (GDAXI) closed 3.21% lower to 12,325.12 for the week
- The DOW (DJI) closed 0.21% lower to 21,349.63 for the week
- S&P 500 (SPX) closed 0.61% lower to 2,423.41 for the week
- Nasdaq Composite (IXIC) closed 1.99% lower to 6,140.42 for the week
But then again, most of the risk aversion this week was due predominantly to the global cyber attack that soured sentiment on tech stocks, especially cyber security companies.
Going back to the yen, the yen’s misery started on Tuesday and didn’t really let up after that because bond yields started surging on Tuesday and didn’t stop rising until the trading week ended.
And as noted in Tuesday’s London session recap bond yields surged after ECB Overlord Draghi gave his hawkish speech. We’ll delve more on Draghi had to say when we discuss the euro later.
Anyhow, the surge in bond yields was sustained, market analysts say, because of additional hawkish rhetoric from other top central bankers, namely BOC Boss-Man Stephen Poloz and BOE Guv’nah Mark Carney.
We already discussed what Carney had to say and we’ll be discussing what Poloz said next when we discuss the Loonie.
The Canadian Dollar
After sliding since late may, oil prices finally made a major comeback this week. And as you can see in the chart above, the Loonie apparently rode this surge in oil prices to end up as the second best-performing currency of the week.
- U.S. WTI crude oil up (CLG6) by 7.72% to $46.33 per barrel for the week
- Brent crude oil up (LCOH6) by 7.55% to $48.98 per barrel for the week
The oil rally started to really pick up the pace on Wednesday, though, thanks to the U.S. EIA’s report which revealed that U.S. oil output fell by 100,000 barrels per day to 9.3 million barrels per day.
And while U.S. oil inventories increased by 118,000 barrels last week instead of falling by 2.1 million, an earlier report from the American Petroleum Institute (API) already redefined expectations because it showed that U.S. crude oil inventories rose by 851,000 barrels last week.
As such, the market was pleasantly surprised to learn that U.S. oil inventories only rose by 118K barrels instead of 851K barrels.
Oil had a final bullish surge on Friday, with positive Chinese data and a fall in U.S. oil rigs being cited as reasons by market analysts.
However, the Loonie didn’t follow suit and had a more mixed yet steady price action, probably because of profit-taking by Loonie bulls since the only catalyst at the time was the BOC’s business outlook survey, and that painted a positive picture overall. But then again, inflation expectations did edge down, and that may have hurt rate hike expectations a bit.
Speaking of rate hike expectations, BOC Boss-Man Poloz was interviewed by the CNBC and Poloz had a very optimistic tone and outlook overall.
To be more specific, Poloz had these to say.
“It’s pretty encouraging. We have had over six months of pretty steady, and in fact in the first quarter, really strong growth, surprisingly so… We do think it’s going to moderate from there, not to slow down dramatically but to be more normal on pace, but still above potential.”
And when Poloz was asked about interest rates, given his optimistic outlook, he had this to say.
“Well rates are of course extraordinarily low and we cut them by 50 basis points in 2015 to counteract the effects of the oil price shock speed up the adjustment. It does look as though those cuts have done their job. But we’re just approaching a new interest rate decision so I don’t want to prejudge. But certainly we need to be at least considering that whole situation now that the capacity excess capacity is being used up steadily.”
Even so, Poloz’s comment and the surge in oil prices were apparently enough to send the Loonie higher and to blunt the pound’s advance against the Loonie.
Other than Poloz, BOC Deputy Governor Lynn Patterson also gave a speech this week. Her speech didn’t really have much of an impact on the Loonie’s price action. Still, her hawkish statements are also worth mentioning, particularly the following:
“Two years later, it is our view that these cuts have helped facilitate the economy’s adjustment to the oil price shock and that the economic drag from lower prices is largely behind us. We will be updating our outlook over the next few weeks, and it will be released on July 12 in our Monetary Policy Report.”
In short, Patterson and Poloz have the same cautious tone (but with clear hints of a bias towards tightening).
The U.S. Dollar
The Greenback had a bad run this week and ended up as the second-worst performing currency after the yen.
And as you can see in the chart above, the Greenback started to lose out against most of its peers on Tuesday. And that only got worse come Wednesday when the Greenback started to lose out to everything except the yen.
As to what drove the Greenback lower this week, practically all market analysts are in agreement that the shifts (or perceived shifts at least) in central bank biases are to blame for the Greenback’s weakness this week.
The rationale for this is that the market’s faith in one more hike from the Fed isn’t really all that high, given the Fed’s downgraded inflation expectation for this year and all the political drama in Washington that has impeded Trump’s fiscal stimulus plans.
And since other central banks were switching to a more hawkish tone this week (or are perceived to be), with the spotlight on the BOE, ECB, and BOC, market players began pricing these in on the hopes of rate hikes down the road.
As such, capital flowed out from the Greenback and into the respective currencies of these central banks, weakening the Greenback in the process.
Basically, interest rate differentials were in play. This time, however, it’s the Greenback that’s on the losing end because of lack of faith in more hikes from the Fed and higher expectations of a future rate hike from these other central banks.
Okay, we already discussed what Poloz and Carney had to say. And now it’s time to take a look at what ECB Overlord Draghi said that propelled the euro higher.
The euro was the third best-performing currency of the week this week, thanks to ECB Overlord Draghi.
I think I did a pretty good job when I highlighted the most important parts of Draghi’s speech in Tuesday’s London session recap, so I’ll just reproduce them here (with a few minor tweaks here and there).
Supreme Overlord of the ECB Mario Draghi, gave the introductory speech at the ECB’s annual forum on central banking on Tuesday.
And Draghi first pointed out that:
“[M]onetary policy is working to build up reflationary pressures, but this process is being slowed by a combination of external price shocks, more slack in the labour market and a changing relationship between slack and inflation.”
And we then got our first optimistic hint when Draghi said the following (emphasis mine):
“These effects, however, are on the whole temporary and should not cause inflation to deviate from its trend over the medium term, so long as monetary policy continues to maintain the solid anchoring of inflation expectations.”
Remember, the ECB still has an easing bias on its QE program and has no plans to taper its QE program just yet because the ECB is not confident that the recent rise in inflation is sustainable.
Draghi’s comment that the factors weighing down on inflation “are on the whole temporary” is therefore pretty hawkish.
Moving on, Draghi then began praising the Euro Zone economy by saying that (emphasis mine):
“Though the euro area recovery started later than those in other advanced economies, we have now enjoyed 16 straight quarters of growth, with the dispersion of GDP and employment growth rates among countries falling to record low levels. If one looks at the percentage of all sectors in all euro area countries that currently have positive growth, the figure stood at 84% in the first quarter of 2017, well above its historical average of 74%. Around 6.4 million jobs have been created in the euro area since the recovery began.”
Draghi then said that the recovery “may be becoming more sustainable” because “for virtually the first time since 1999, spending has been rising while indebtedness has been falling.”
Draghi then expounded on why he thinks the factors that are weighing down on inflation are temporary before concluding that “reflationary dynamics” are “slowly taking hold.”
As such, the ECB now needs “to ensure that overall financing conditions continue to support that reflationary process, until they are more durable and self-sustaining.”
He then said that (emphasis mine):
“As the economy continues to recover, a constant policy stance will become more accommodative, and the central bank can accompany the recovery by adjusting the parameters of its policy instruments – not in order to tighten the policy stance, but to keep it broadly unchanged.”
That’s obviously a hint that the ECB is ready and willing to “adjust” its monetary policy tools if things continue to improve in the Euro Zone, although Draghi does not want to refer to such an action as tightening or tapering or hiking.
Also, Draghi gave his usual warning and caveats that “there are strong grounds for prudence in the adjustment of monetary policy parameters, even when accompanying the recovery,” adding that any adjustments “have to be made gradually, and only when the improving dynamics that justify them appear sufficiently secure.”
Moving on, Draghi’s hawkish comments caused the euro (and the Swissy) to jump higher. And there was follow-through buying to boot.
The euro’s advance finally got halted on Wednesday, though, very likely because ECB Sub-Lord Vitor Constancio was in a CNBC interview and Constancio was notably more cautious.
To be more specific, Constancio said that “domestic factors of inflation starting with wage and cost developments and then also price decisions are not responding the way we [the ECB] would expect in view of our more common estimates of this slack.”
This made ECB officials ask if the ECB’s “measures of the slack of the economy [are] correct,” according to Constancio. Moreover, Constancio warned that it’s possible that the slack in the economy may be greater than the ECB had originally estimated, which is why Constancio placed more stress on the Draghi’s caveats rather than Draghi’s hawkish message.
After that, the euro steadied for a bit before getting a bearish kick when Bloomberg released a report that cited unnamed ECB sources as saying that the market “misjudged” Draghi’s message about “adjusting” its monetary policy instruments.
Reuters released a similar report a short while later, but that also cited unnamed ECB sources.
Incidentally (well, not really), these reports came out about an hour before Poloz and Carney began speaking. And this is the point in time at which the euro lost to the Loonie and the pound respectively, although the euro did recover against some peers while trading roughly sideways against other.
The New Zealand Dollar
The Kiwi’s five-week winning streak finally ended this week since the Kiwi was the third worst-performing currency of the week. And it’s highly probable that the shifts in central bank biases may have been in play not only on the Greenback, but on the Kiwi as well since the Kiwi suffered its biggest losses on Tuesday when ECB Draghi gave his hawkish speech.
Other than that, it’s also highly probable that risk sentiment was in play since risk aversion did prevail this week. And as noted on Tuesday’s London session recap, risk aversion started to drown the markets on Tuesday. Further evidence that risk sentiment may have been in play is how the Kiwi started to tilt higher on Friday when risk appetite returned, as mentioned in Friday’s London session recap.
The Australian Dollar
As can be seen in the chart above, the Aussie tried its best to track the surge in iron ore prices. Unfortunately for the Aussie, demand for the euro, the Loonie, and the pound were just too strong to overcome. And so the Aussie ended up having a mixed performance this week (but still a net winner).
As to what pushed iron ore higher this week, market analysts pointed mainly to higher steel prices and higher Chinese iron ore futures due to speculation that Chinese steel mills will increase production after a crackdown by Chinese authorities on steel mills that failed to pass pollution standards.
The Swiss Franc
The Swissy had a mixed performance this week, but was a net loser overall. As usual, however, the Swissy was dancing in tandem with the euro, so it jumped higher with the euro when Draghi delivered his hawkish speech on Tuesday and then hesitated when Constancio called for caution and then plunged when those rumors came out.
But without any direct catalysts for the Swissy itself, it fell victim to the euro, the Loonie, the pound, and the Aussie, closing out the week as a net loser as a result.
And interestingly enough, EUR/CHF just trended higher during the course of the week. Whether this was due to SNB meddling or not, I’m not really sure.