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?
Nice. 6 out of the top 10 movers are Aussie pairs, so the Aussie clearly dominated this week. That probably surprised many of you who were expecting the Loonie to come out on top, huh? So, what drove the Aussie higher this week and why did the Loonie lose out to the Aussie? And how did the other currencies fare, by the way? Well, time to find out!
The Australian Dollar
After getting stomped last week, the Aussie turned the tables on its rivals and was the one doing most of the stomping to end up as best-performing currency of the week, even though there were only low-tier catalysts for the Aussie this week. And Aussie bulls can thank the rebound in iron ore prices and the revival of risk appetite for that.
Market analysts attribute this week’s rebound in iron ore prices to expectations that the supply of domestic Chinese iron ore will fall. This is apparently because domestic Chinese iron ore is of lower quality, which means more pollution during the production process. And that, coupled with China’s ongoing crackdown on steel mills that fail to meet pollution standards, has resulted in lower inventory levels for domestic iron ore.
Also, China’s import data showed that imports of iron ore are expected to exceed 1 billion metric tons and smash last year’s record high by a wide margin to boot, which likely helped to underpin demand for iron ore as well.
Iron ore did slid lower on Wednesday and the latter half of Thursday, though. And market analysts blamed that on profit-taking due to expectations that iron ore prices will drop sooner or later because of the seasonally low demand.
Instead of dropping with iron ore, however, the Aussie held fast (for the most part) on Wednesday and continued to advance during the latter half of Thursday. And that’s very likely because risk-taking was in full-swing on Wednesday and Thursday, which helped to shield the higher-yielding Aussie and keep it supported.
As to why risk sentiment got revived this week, market analysts attributed that to the broad-based commodities rally this week, which gave mining shares a boost, and Fed Head Yellen’s cautious tone, which caused bond yields to plummet and made equities relatively more attractive.
In fact, the major equity indices were in the green for the week. And most of them captured the bulk of their gains on Wednesday and Thursday.
- Nikkei 225 (N225) closed 0.95% higher to 20,118.86 for the week
- Shanghai Composite (SSEC) closed 0.14% higher to 3,222.42 for the week
- Hang Seng (HSI) closed 4.14% higher to 26,389.23 for the week
- The Euro Stoxx 50 (STOXX50E) closed 1.69% higher to 3,522.42 for the week
- The FTSE 100 (FTSE) closed 0.37% higher to 7,378.39 for the week
- The DAX (GDAXI) closed 1.96% higher to 12,631.72 for the week
- The DOW (DJI) closed 1.04% higher to 21,637.74 for the week
- S&P 500 (SPX) closed 1.41% higher to 2,459.27 for the week
- Nasdaq Composite (IXIC) closed 2.59% higher to 6,312.46 for the week
The U.S. Dollar
The Greenback had a really bad run this week. And as can be seen in the overlay of Greenback pairs above, the Greenback started to slide broadly lower during Tuesday’s U.S. session. And as I pointed out in Tuesday’s U.S. session recap, that was due to a barrage of Fed officials all expressing doubt over the Fed’s inflation outlook and the path for the Fed Funds Rate.
Arguably, the one that triggered the Greenback’s broad-based slide was U.S. Fed Governor Lael Brainard since she was the one who spoke first. As for specifics on Brainard’s speech, the following are the most noteworthy (emphasis mine).
“If the data continue to confirm a strong labor market and firming economic activity, I believe it would be appropriate soon to commence the gradual and predictable process of allowing the balance sheet to run off. Once that process begins, I will want to assess the inflation process closely before making a determination on further adjustments to the federal funds rate in light of the recent softness in core PCE (personal consumption expenditures) inflation. In my view, the neutral level of the federal funds rate is likely to remain close to zero in real terms over the medium term. If that is the case, we would not have much more additional work to do on moving to a neutral stance. I will want to monitor inflation developments carefully, and to move cautiously on further increases in the federal funds rate, so as to help guide inflation back up around our symmetric target.”
Philadelphia Fed President Harker expressed the same views on inflation and future path of the Fed Funds Rate during a Wall Street Journal interview while Minneapolis Fed President Neel Kashkari, the only voting FOMC member who has consistently voted against hiking rates, gave his usual reasons about why he continues to oppose hiking rates.
Moving on, the Greenback got another bearish kick on Wednesday when the text of Yellen’s opening statement for her testimonies was released.
As for specifics, Yellen expressed a more cautious tone on inflation and the economy when she said the following:
“Of course, considerable uncertainty always attends the economic outlook. There is, for example, uncertainty about when–and how much–inflation will respond to tightening resource utilization.”
“At present, I see roughly equal odds that the U.S. economy’s performance will be somewhat stronger or somewhat less strong than we currently project.”
And Yellen said this very juicy bit during the Q&A portion, which further highlights Yellen’s cautious tone on inflation, as well as the Fed’s lack of confidence that inflation will pick up as forecasted:
“We’re watching this [weak inflation] very closely and stand ready to adjust our policy if it appears the inflation undershoot appears consistent.”
And with regard to the future path of the Fed Funds Rate, Yellen had this to say (emphasis mine):
“Because the neutral rate is currently quite low by historical standards, the federal funds rate would not have to rise all that much further to get to a neutral policy stance.”
Ouch! By the way, Forex Gump has a roundup of the most recent Fed speeches and you can read it here, if you’re interested.
Anyhow, the Greenback got a final bearish kick on Friday when the U.S. retail sales and CPI reports both failed to meet expectations, with headline retail sales printing the second consecutive fall (-0.2% vs. +0.1% expected, -0.1% previous) and headline CPI flattening out in June (0.0% vs. +0.1% expected, -0.1% previous).
The Canadian Dollar
Last week, I told y’all to keep an eye on the Loonie since the BOC statement was coming up. And, well, that was pretty good advice since the Loonie ended up as the second best-performing currency of the week.
And obviously, Loonie bulls can thank the BOC’s statement for that, although oil prices also helped since oil was in rally mode this week.
- U.S. WTI crude oil (CLG6) up by 5.56% to $46.69 per barrel for the week
- Brent crude oil (LCOH6) up by 5.01% to $49.05 per barrel for the week
Forex Gump has the details on the BOC statement. You can read his write-up on that here, if you’re interested. The short of it, though, is that the BOC decided to hike the Overnight Rate for the first time in seven years. Moreover, BOC Boss-Man Poloz hinted during the presser that the BOC may be looking to hike some more if the Canadian economy continues to improve when he said the following (emphasis mine):
“The most important thing is the economy clearly no longer need as much as stimulus as we’ve been giving it. But at the same time, we’re letting you know that the world has changed enough in recent years.”
“In the full course of time, I don’t doubt that interest rates will move higher, but there’s no predetermined path.”
Interestingly enough, however, the BOC statement was also apparently one of the reasons why the Loonie didn’t rank higher than it did. Just look at how price action played out on Tuesday and you’ll get what I mean.
As you can all see, oil soared on that day, thanks to the American Petroleum Institute’s report showing a huge draw in U.S. oil inventories, which spurred speculation that official data from the U.S. Energy Information Administration would also print a large decline in crude oil inventories, which is exactly what happened (-7.6M vs. -3.2M expected, -6.3M previous).
However, the Loonie failed to follow suit. In fact, the Loonie was drifting slightly lower on most pairs, likely because Loonie bulls were taking some profits off the table ahead of the BOC statement.
Overall, the Loonie had another good run this week, but the risk-on vibes, the rally in iron ore prices, and the Loonie’s failure to track oil prices higher on Tuesday allowed the Aussie to overtake the Loonie, so the Loonie only ended up in second place.
The Swiss Franc
The Swissy was the second weakest currency of the week. As usual, the euro and the Swissy were still dancing in tandem, but we’ll be discussing what drove the euro’s price action later.
As to why the Swissy lost out to the euro, that was apparently due to the euro’s own price action, although I wouldn’t discount SNB meddling.
Anyhow, looking at EUR/CHF above, we can see that the euro advanced against the Swissy on Monday on Tuesday, likely as a continuation of the euro’s strength from last week (and/or SNB meddling).
The euro then retreated against the Swissy on Wednesday. And as you’ll see later, the euro was actually broadly in retreat, thanks supposedly to profit-taking by euro longs.
After that, the euro recovered on Thursday and Friday when the Wall Street Journal cited unnamed sources as saying that the ECB may announce an upbeat assessment of the Euro Zone in the Jackson Hole Summit in August and may even announce plans to taper on September.
The Pound Sterling
After last week’s terrible performance, the pound managed to stage a broad-based recovery and even managed to end up as the third best-performing currency this week. And while the overlay of GBP pairs looks mixed, we get a cleaner picture if we strip GBP/CAD and GBP/AUD away.
As you can see, the pound initially tried to climb higher during Tuesday’s London session. And as noted in Tuesday’s London session recap, this was attributed to cautious optimism that BOE Policymakers Haldane and Broadbent would address last week’s disappointing data but still remain hawkish.
Unfortunately, Haldane’s speech was inconsequential. Worse, Ben Broadbent used his speech to warn about the negative repercussion of Brexit on trade when he said that “a significant curtailment of trade with Europe would force the U.K to shift away from producing the things it’s been relatively good at.”
Worse still, Broadbent blatantly said in an interview the following day that in his opinion, “it is a bit tricky at the moment to make a decision (to raise rates), before revealing his dovish feathers when he said that “I am not ready to do it yet.”
It should be noted, however, that Broadbent’s monetary policy stance is similar to BOE Guv’nah Carney’s in that both of them are looking to hike rates but both don’t think the data already warrants a rate hike.
Fortunately, the pound finally found a bottom shortly after Broadbents interview, thanks to the U.K.’s net positive jobs report. I already wrote an extensive write-up on the jobs report in Wednesday’s London session recap, but here it is, if you somehow missed it.
And according to the ONS, the jobless rate ticked lower to 4.5% in the three months to May. This is a new record low since comparable records began in 1975. Moreover, the consensus was that it would hold steady at 4.6%. Even better, the downtick in the jobless rate appears to be a healthy one since the employment rate actually rose from 74.8% to 74.9%, a record high since 1971.
As for the number of people claiming unemployment benefits in June, ONS reported a 6.0K increase, which isn’t as bad as the 10.5K increase. Also, the increase in June was weaker compared to the 7.5K increase back in May. And did I mention that the reading for June was a four-month low?
Moving on to wage growth, nominal average weekly earnings (bonuses included) increased by 1.8% year-on-year in May, with a three-month average of 1.8%.
The three-month average is a drastic slowdown compared to the 2.1% posted in April. Still, the slower 1.8% increase is within expectations so it isn’t too disappointing.
And besides, the year-on-year reading of 1.8% is faster than +1.3% reported in April. Also, April’s reading was actually slightly upgraded from 1.2% to 1.3%.
What’s even better is that wages grew at a faster pace, even as bonuses slumped by 7.2% year-on-year, since nominal wages stripped of bonuses rose by 2.3% (1.8% previous), which is the fastest in six months.
The only downbeat thing about wages is that real earnings (inflation is taken into account) continue to take hits, with real average weekly earnings (bonuses included) falling by 0.9%.
But on a more upbeat note, the 0.9% fall in real earnings in May is a bit softer compared to the 1.3% slump recorded in April.
Moving on, the pound’s strength was sustained, market analysts say, by the upbeat jobs report and BOE Hawk Ian McCafferty’s interview with The Times newspaper wherein McCafferty said that he may still vote for a rate hike next month and even suggested that the BOE should follow the U.S. Fed’s lead and start planning on unwinding some of its bond holdings.
Finally, the pound surged higher to claim third place on Friday when the U.S. released its disappointing retail sales and CPI reports.
This may seem like a weird reaction at first, but it makes more sense when you consider that the U.K.’s jobs report and McCafferty’s hawkish stance caused BOE rate hike expectations to rise while the poor U.S. economic reports and cautious Fed rhetoric during the week caused expectations for a U.S. Fed rate hike to fall.
In other words, there was a divergence in monetary policy expectations since the market was now expecting the BOE to hike earlier while odds for a Fed rate hike got sunk like the Titanic. And this divergence in monetary policy expectations was obviously in the pound’s favor while the Greenback got the short end of the stick (and then got beaten with the stick, too).
The euro had a steady start before climbing higher on Tuesday. Market analysts say this was a continuation of last week’s euro strength because of higher expectations that the ECB may be hiking the deposit rate or tapering its QE program sooner or later.
Sadly, the euro began to lose steam during Tuesday’s Asian session before going into a full-blown rout by the time the U.S. session rolled around.
The euro’s weakness persisted until the Wall Street Journal released a report on Thursday. According to unnamed sources cited in the report, ECB Overlord Draghi will be participating in the U.S. Fed’s Jackson Hole conference in August and Draghi will supposedly use this event to give “a further sign of the ECB’s growing confidence in the eurozone economy and its reduced dependence on monetary stimulus.”
The report also cited unnamed ECB officials as supposedly saying that “the bank is likely to signal at its Sept. 7 policy meeting that the bond-buying program, known as quantitative easing, will be gradually wound down next year.”
These hawkish rumors apparently caused Euro Zone bond yields and the euro itself to jump higher. After that, the euro remained well-supported and traded mostly sideways until the end of the week, except against the mighty Aussie of course.
Makes you wonder how the ECB statement will go and how the euro will fare next week, huh?
The Japanese Yen
The yen had a mixed performance this week and it’s price action looks pretty messy, too. But if we remove AUD/JPY and CAD/JPY, then we get this.
As you can see, the yen is still tracking bond yields for the most part, so the yen started to gain strength on Tuesday when bond yields started to falter due to the cautious rhetoric from Fed officials, according to market analysts.
The yen then continued its advance when bond yields plunged on Wednesday, due to Fed Head Yellen’s speech, market analysts say. Interestingly enough, risk appetite was in full-swing by Wednesday, but that didn’t seem to faze the yen. In fact, the yen was the second best-performing currency of the week at this point.
Unfortunately for the yen, bond yields rebounded on Thursday, which dragged the yen lower and the yen’s forex rivals were more than happy to take advantage of the yen’s weakness.
And the rebound in bond yields was pinned by market analysts on bond selling ahead of a U.S. bond auction, as well as revived ECB tapering expectations due to the Wall Street Journal article that cited unnamed ECB sources, which we already discussed when we talked about the euro.
Bond yields fell back down on Friday, thanks to another round of bond-buying in the wake of Yellen’s second testimony and disappointing U.S. CPI. The damage done to the yen on Thursday was more than enough to prevent the yen from regaining its former ranking, though. Still, the yen was a net winner for the week.
The New Zealand Dollar
The Kiwi’s had another mixed performance and still ended up as a net loser, just like last week.
But if we filter out AUD/NZD and NZD/CAD, then we can see that the Kiwi managed to at least put up a fight when it tried to climb higher on Wednesday and Thursday.
As to why the higher-yielding Kiwi was able to put up a fight, that was likely due to the risk-on vibes and commodities rally at the time, as mentioned in Wednesday’s London session recap and Thursday’s London session recap and when we discussed the Aussie earlier.
Also, bond yields were in decline at the time, which likely made the higher-yielding Kiwi more attractive. Although bond yields jumped back up on Thursday, so the Kiwi’s advance got stopped and the Kiwi’s price action became a mess after that, which implied that opposing currencies were dictating price action on Kiwi pairs.