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?
Looks like the Loonie had another good run since half of the top 10 movers are Loonie pairs, which is pretty amazing since oil took hits this week. So, what drove the Loonie higher and how did the other currencies fare? Well, read on and find out.
The Canadian Dollar
The Loonie only came in second place last week. This week, however, the Loonie was the one currency to rule them all. And interestingly enough, oil actually tanked this week due to renewed oversupply jitters because of OPEC exports rising to a 2017 high and U.S. oil output recovering by 1% to 9.34 million barrels per day after dropping during the previous week.
- U.S. WTI crude oil (CLG6) down by 2.55% to $44.36 per barrel for the week
- Brent crude oil (LCOH6) down by 2.66% to $46.83 per barrel for the week
And as you probably saw in the overlay of Loonie pairs earlier, the Loonie charged higher across the board as a result, even though oil only nudged slightly higher on that day.
As for specifics, Poloz was asked if the BOC may be switching to a hiking bias, Poloz answered as follows (emphasis mine):
“As our senior deputy governor said a week ago, when you are driving towards a red stoplight, you ease up on the accelerator well before you get there instead of waiting for the last second to stop. I think the same thinking is true in monetary policy, because you must anticipate where the economy will be 18 or 24 months from now. If we only watched inflation and reacted to inflation, we would never reach our inflation target, we’d always be two years behind in the reaction. So we have to look at the rest of our indicators in the models that predict inflation.”
That forward-looking response, plus Poloz’s optimistic view on the Canadian economy and lack of concern over the recent slide in inflation, heavily implies that the BOC may indeed be switching to a hiking bias sooner or later, perhaps as early as next week’s BOC statement.
Poloz was then asked if the volatility of oil prices will have an effect on the BOC’s monetary policy decision next week. And Poloz replied by shrugging that off when he said the following:
“It will figure, but I do not see that as the big issue of the day. Not yet anyway.”
And when Poloz was asked about Canada’s housing market problems, he replied as follows (emphasis mine):
“People have a buffer in their finances in case interest rates do rise. There’s quite a resilient structure to the market. Even though the stock of debt is rising, we believe what is happening is that the new households with no debt are buying their first home and taking on the debt. That adds to the stock of debt but it makes it no less resilient, because they are well qualified for the debt.”
In short, Poloz acknowledged that housing debt is indeed rising, but the BOC doesn’t think that it’s a problem because the underlying fundamentals are good. More importantly (for rate hike junkies), Poloz let slip that a rate hike won’t be a problem for the housing market when he said that “People have a buffer in their finances in case interest rates do rise.”
Moving on, Poloz’s hawkish rhetoric and expectations that the BOC may become hawkish next week very likely helped to shield the Loonie when oil started to slide on Wednesday. And this is made abundantly clear when the Loonie completely ignored oil prices when Canada’s June Jobs Report came out on Friday.
As for some details, the Canadian economy generated 45.3K jobs in June, which is significantly better than the consensus for a 11.3K increase. Aside from beating expectations, the quality of jobs created was also pretty good since full-time employment rose by 8.3K while part-time employment increased by 37.1K. Moreover, the jobless rate improved from 6.6% to 6.5%, even though the labor force participation rate rose from 65.8% to 65.9%, which is a good sign for the Canadian economy.
Anyhow, make sure to keep an eye on the Loonie next week since the BOC will be giving its highly-anticipated monetary policy statement. And that will either validate expectations for a switch to a hiking bias or kill it. Either way, chances are good that volatility on the Loonie may pick up.
The Japanese Yen
The yen had another rough week and ended as the worst-performing currency (yet again), even though risk aversion continued to prevail for the most part.
The yen started the new trading week by gapping higher against its peers, thanks to news over the weekend that Shinzo Abe’s Liberal Democratic Party lost in local Tokyo elections. Bond yields were rising at the time, though, as the global bond selling from last week got extended. As a result, those gaps very quickly got filled.
Bonds yields later dipped during Monday’s morning London session, but the yen continued to step back against its rivals, apparently because risk appetite was in full-swing during Monday’s European session. And the yen’s luck only got worse during Monday’s U.S. session as bond yields snapped higher on positive U.S. manufacturing data, which market analysts say caused rate hike expectations to improve.
U.S. markets were closed on Tuesday to celebrate Independence Day but global bond yields slumped and risk aversion returned on Tuesday due to a number of factors, which include sliding commodity prices and news about another North Korean missile test.
Also, European bond yields initially tumbled on Tuesday because of the ECB’s pushback against the market’s hawkish interpretation of Draghi’s speech last week, according to market analysts.
As such, the yen was able to find some respite on Tuesday, although global bond yields began rising again near the end of the morning London session, so the yen gave back some of its gains and then steadied until Wednesday rolled around.
U.S. bond yields were back in play come Wednesday, but they ultimately went nowhere, so the yen traded roughly sideways for the day.
Bond yields later surged on Thursday because of renewed expectations that the ECB would tighten after the ECB’s meeting minutes were released. Instead of weakening across the board, however, most yen pairs opted to continue trading sideways and ended the day mixed. No clear reason why, though. But then again, risk aversion did intensify at the time. And that may have fueled safe-haven demand for the yen.
Anyhow, things were back to normal on Friday since the yen weakened as bond yields continued to rise.
Oh, the yen did get a sharp bearish kick during Friday’s Asian session. And that was apparently due to the BOJ’s announcement that it would buy unlimited JGBs to keep bond yields of 10-year JGBs at around 0%.
And for the newbies out there who are wondering why bond yields and the Japanese yen have an inverse correlation (yen weakens as bond yields rise and vice versa), that’s because of the BOJ’s so-called “QQE With Yield Curve Control” framework of targeting bond yields to keep long-term borrowing costs low.
Basically, market players expect the BOJ to step in whenever bond yields rise. And the BOJ does this through bond purchases from financial institutions (namely banks), rather than from the government. And bond purchases are done in cash, which means increasing the supply of yen. More yen = weaker exchange rate. Not only that, keeping yields at around 0% would dissuade both local and foreign investors from loading up on JGBs and look for higher yields elsewhere, thereby also lowering demand for the yen.
The U.S. Dollar
The Greenback had a reversal of fortunes since it was the second-worst performing currency last week but ended up as the second best-performing currency this week.
And while the overlay of Greenback pairs looks kinda messy, price action on the Greenback looks more uniform if we remove USD/CAD.
As you can see in the chart above, most Greenback pairs harvested the bulk of their gains from Monday to Wednesday, ahead of the FOMC minutes.
And some market analysts attributed the Greenback’s strength on higher U.S. bond yields while other market analysts pointed to Greenback shorts unwinding their bets after the Greenback got a good beating in Q2.
And when the minutes of the Fed’s minutes were finally released, Greenback pairs tossed and turned before going their own separate ways.
You can read up on Forex Gump’s take on the FOMC minutes here. The short of it is that the minutes showed that Fed officials were a bit divided on inflation, which very likely dampened rate hike expectations and placed a question mark on Fed Head Yellen’s rather hawkish outlook on inflation.
Anyhow, the Greenback’s mixed performance continued on Thursday and Friday’s Asian session, so opposing currencies were obviously dictating price action on Greenback pairs. The Greenback then steadied (while tilting mostly higher) during Friday’s London session, as traders waited for the NFP report.
And when the NFP report came out, non-farm payrolls easily surpassed expectations but wage growth was a big disappointment yet again. As a result, the Greenback tossed and turned once more. But as Forex Gump pointed out in his Quick Rundown of the June NFP Report, the June NFP report was enough to cause expectations for a December rate hike to improve, so the Greenback ultimately ended up mostly higher in the wake of the NFP report.
There was no follow-through buying, though. Even so, the Greenback’s strong performance from Monday to Wednesday was enough to secure second place for the Greenback (for this week at least).
The Australian Dollar
The poor Aussie got dragged lower by the slump in iron ore prices this week. And the slump, market analysts say, was due to signs of weakening Chinese demand and surplus supply.
Other than the slide in iron ore prices, the Aussie also got smacked lower because of the RBA statement. Forex Gump has the details and his own take on that, so read his write-up here, if you’re interested.
The gist of it all, though, is that the RBA refrained from joining the other central banks who are beginning to whistle a more hawkish tune (well, that’s the market’s perception anyway) by presenting a very neutral tone in its press statement.
Moreover, the RBA’s optimistic forecast that “economic growth is still expected to increase gradually over the next couple of years to a little above 3%” was conspicuously removed from its press statement, although the RBA noted that it still expects the Australian economy “to strengthen gradually.”
The euro had a repeat performance because it ended up as the third best-performing currency of the week yet again.
And this week, euro bulls can sign their praises to (and euro bears can utter their curses on) the minutes of the June ECB meeting since the euro was mixed and trading mostly sideways before that.
As for the details, most of the contents weren’t really new. But as pointed out in Thursday’s London session recap, we got these delicious bits to chew on (emphasis mine):
“Similarly, it was argued that the improved economic environment with vanishing tail risks, in principle, suggested also revisiting the easing bias with respect to the APP purchases, whereby the Governing Council signalled its readiness to increase the pace and/or duration of the asset purchases if necessary.”
“However, it was cautioned that prudence remained warranted, as the economic expansion had yet to translate into stronger inflation dynamics, and a sustained adjustment in the path of inflation towards the Governing Council’s inflation aim could not yet be confirmed. The assessment of the prospects for a sustained adjustment argued for patience, as the inflation outlook remained vulnerable to a premature tightening of the monetary policy stance.”
“Therefore, in the light of the prevailing uncertainties, predominantly related to global factors, the Governing Council was well advised to adapt its forward guidance to the changing economic environment only very gradually.”
“At the same time, it was cautioned that even small and incremental changes in the communication could be misperceived as signalling a more fundamental change in policy direction. This could trigger unwarranted movements in financial conditions, which could put the prospects of a sustained adjustment of inflation at risk.”
In simple English, ECB officials also talked about the possibility of dropping their easing bias on the ECB’s QE program. Remember, the ECB removed its cutting bias on interest rates but explicitly said that it still has an easing bias on its QE program during the June ECB statement.
However, the minutes revealed that ECB officials also discussed the possibility of dropping the easing bias on asset purchased but ultimately decided against it because they don’t think the recent rise in Euro Zone inflation is already sustainable.
Moreover, if the ECB removes its easing bias on its QE program, it may cause financial conditions to tighten (i.e. higher bond yields) and the ECB doesn’t want that.
Still, the fact that the ECB even considered “revisiting” their easing bias on the ECB’s QE program is a very hawkish sign that the ECB may do just that sooner or later if the Euro Zone economy continues to improve. And that’s obviously a rather hawkish signal, and is very likely why the euro rallied for half a day.
Also, the minutes somewhat confirm that the market’s hawkish interpretation of ECB Overlord Draghi’s speech from last week, even though ECB Vice Lord Constancio and other prefer to focus on the more cautious aspects of Draghi’s speech, as well as Draghi’s usual caveats.
The Pound Sterling
How the mighty have fallen! The pound was the strongest currency last week but it was a net loser this week.
Strangely enough, the pound then began to tilt higher starting on Wednesday. Market analysts attributed this wonky price action on forex traders being undeterred from betting on a future BOE rate hike.
Unfortunately for pound bulls, Friday came around and the pound got sucker punched when a bunch of U.K. economic reports came out.
Specifically, industrial production in the U.K. fell by 0.1% month-on-month in May, severely missing expectations that industrial production would expand by 0.4% after the previous rise of 0.2%.
Industrial production accounts for around 14% to 15% of the U.K.’s GDP. And the drop in May means that unless industrial production rebounds by 1.2% month-on-month (or better) come June, then industrial production will likely be a drag on quarter-on-quarter GDP growth for Q2.
Furthermore, industrial production slid further by 0.2% year-on-year, marking the second month of declines for the annual reading, which means that the annual reading for Q2 GDP growth will very likely take a hit as well.
Another disappointing top-tier economic report is the U.K.’s trade gap widening from £2.116 billion to £3.073 billion in May, thanks to the U.K.’s goods trade deficit widening from £10.595 billion to £11.863 billion, as imports grew at a faster pace than exports (+0.9% vs. +2.7% imports).
These likely dealt a blow on BOE rate hike expectations since the BOE is expecting trade and other aspects of the economy to make up for the expected weakness in consumer spending.
The Swiss Franc
The Swissy had another mixed week. This time, however, the Swissy was a net winner overall.
And as usual, the Swissy pairs had similar price action to euro pairs. But as marked below, the Swissy didn’t get as much of a boost ahead of and after the ECB’s meeting minutes were released on Thursday, which is why the Swissy didn’t rank higher. As to whether the Swissy’s more muted response to the minutes was due to SNB meddling, I’d leave that to your imagination.
The New Zealand Dollar
The Kiwi’s was a net loser again this week. And while the overlay of Kiwi pairs look pretty chaotic, we get this if we remove AUD/NZD.
As you can see, the Kiwi was trending broadly lower from Monday to Thursday before becoming more mixed come Friday.
As you can also see, economic data and the dairy auction this week didn’t really have an immediate impact on the Kiwi’s price action.
It does look like the Kiwi’s price action was being dictated more by risk sentiment, though, since risk aversion was the dominant sentiment from Tuesday to Thursday. And as we can see on the chart, the higher-yielding Kiwi was tilting to the downside then.
And when risk sentiment finally improved on Friday, thanks to the NFP report, we can see that the Kiwi was more mixed but closed mostly higher on that day.
However, we can’t pin this entirely on risk sentiment since risk appetite prevailed on Monday and yet the Kiwi initially tanked before finally climbing higher near the end. There’s no clear reason for this early weakness, but it’s possible that the perceived shifts in central bank biases and the surge in bond yields last week may have continued to weigh down on the Kiwi due to the Kiwi’s weaker yield advantage.