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?
Pound weakness was a major theme this week since 6 out of the top 10 movers are pound pairs, with the pound losing out in each and every one of them. As for this week’s champ, if you guessed the euro, then sorry but you’re wrong since the Swissy had The One Ring to rule them all.
The Swiss Franc
The Swissy managed to edge out the euro to become this week’s champion. And as usual, the Swissy was dancing in tandem with the euro, which means that the euro did well as well.
But why was the Swissy able to edge out the euro, you ask? Well, if you look at the overlay of Swissy pairs, you can see that the Swissy was mostly steady ahead of the ECB statement, very likely because of safe-haven demand because of the renewed Brexit jitters and uncertainty ahead of the ECB statement.
But as you can see below, the euro was on the back foot ahead of the ECB statement, very likely because of unwinding by shorter-term traders who wanted to avoid the ECB-related volatility. And this gave the Swissy an early advantage against the euro.
Also, a Reuters report was released on Friday, which caused the euro to temporarily slide lower against most of its rivals (more on that later when we discuss the euro). Instead of weakening, however, the Swissy ended up getting a boost instead. And this can be clearly seen when we look at EUR/CHF’s price action.
To sum it all up, the Swissy was able to steal a win from the euro because the Swissy was able to take advantage of bouts of weakness on the part of the euro. That’s it. I guess that also means that the SNB ain’t a happy bunch right now.
The Pound Sterling
The pound got the wind knocked out of it and ended up as this week’s worst-performing currency.
The pound’s weakness started right from the get-go. And as mentioned in Monday’s London session recap, this was attributed by market analysts to renewed Brexit-related jitters since the second round of Brexit talks started on Monday. And it just so happens that the agenda for the week was on the rights of expatriates and the E.U.’s demand that the U.K. pay up before it can leave the Union, which could be a source of conflict in the negotiating process.
And as of today, we know that the U.K. and the E.U. were able to agree on some aspects of the rights of expatriates but failed to come to an agreement on others, so there are still a lot that needs to be done. And as expected, the U.K. and the E.U. completely failed to have a meeting of the minds when it came to the E.U.’s demand that the U.K. pay up before the divorce.
Aside from Brexit-related jitters, the other reason for the pound’s losses this week is the U.K.’s June CPI report since CPI was flat month-on-month in June, ending four consecutive months of increases and missing expectations for a 0.2% rise to boot.
Year-on-year, this translates to a 2.6% increase, missing expectations that it would match the previous month’s pace of +2.9%. This marks the first time since October 2016 that the year-on-year reading for inflation eased and is a three-month low to boot.
One thing worth pointing out here is that the headline year-on-year reading of +2.6% is within the BOE’s staff forecast, as laid out in the May Inflation Report. The “poor” reading is therefore unlikely to deter BOE hawks from supporting or thinking about future hikes.
BOE Guv’nah Mark Carney even said as much in a Sky News interview when he noted that the “big picture” on inflation was unchanged.
But then again, it’s not really enough to entice more BOE members to join the hawkish camp as well, so the pound’s negative reaction is somewhat understandable.
And while the U.K.’s June retail sales report came in better-than-expected and will very likely give Q2 GDP growth a boost, Brexit fears unfortunately continued to weigh down on the pound.
“Well, we don’t want to have no deal. It is much better that we have a deal than no deal. We can, of course, survive with no deal, and we have to go into a negotiation with those on the other side knowing that that is what we think.”
Fox’s statement apparently reignited fears of a so-called “Hard” Brexit. And unfortunately for pound bulls, Fox gave his statement just before the U.K.’s retail sales report came out, so the upbeat retail sales report wasn’t able to spark some fireworks.
In summary, the pound got whupped this week due to renewed fears of a so-called “hard” Brexit and weakened expectations of a BOE rate hike because of the miss in CPI.
The euro was the second best-performing currency of the week. And most of you probably already know that the source of the euro’s strength was the ECB Presser.
Forex Gump already has the details, so read his write-up here, if you’re interested. The gist of it, though, is that the ECB maintained its easing bias on its QE program and Draghi even tried his best to sound cautious or dovish. However, Draghi still left the door open for a possible tapering move by September at the earliest when he said the following (emphasis mine):
“We also were unanimous in communicating no change to the forward guidance; and also we were unanimous in setting no precise date for when to discuss changes in the future.”
“That’s exactly why we are having this discussion in autumn, and why we didn’t want to set a precise date; because we have to have all the available information at that point in time, which we’ll certainly have by then.”
“In September we’ll be having the macroeconomic projections, we’ll be having staff macroeconomic projections, so there is more information that we can look at between now and then. It’s basically the sense of the Governing Council that we will have more confidence in taking a decision with more information than we have today.”
The point of focus here is that change IS coming. And that change will very likely be in the form of some sort of policy tightening or tapering. The only real question is when, although Draghi won’t commit to a set date.
Aside from that, Draghi was also asked about the fact that the euro is currently the best-performing currency of the year (so far) and if this will be bad for the Euro Zone economy and inflation.
And apparently, Draghi and company aren’t too worried about the euro’s recent rise because Draghi said the following:
“The repricing of the exchange rate has received some attention during the various exchanges of views, and in various ways. That’s been something that, just as I said, has received some attention.”
Moving on, the euro’s rise hit a speed bump on Friday when a Reuters report was released. According to the report, “four sources with direct knowledge of the discussion” at the ECB said that “All the signs are pointing to October” because “There will be little to decide on in September… and December is just too far out.”
Moreover, a different source that was cited in the report revealed that “the Governing Council discussed Draghi’s speech in Sintra, Portugal, where he opened the door to policy tweaks, and there was agreement to not walk back on that message.”
The market has, of course, been betting that the ECB will make its move on September, so the euro initially reacted negatively to the report since it pushed back expectations for a tightening move from the ECB.
However, the report does reaffirm (for what it’s worth since it’s basically a rumor) that change IS coming, so the euro later resumed its climb on most pairs to secure its position as the second best-performing currency of the week.
The U.S. Dollar
The Greenback another bad run this week. But on the bright side, the Greenback was only the second biggest loser of the week, which is a slightly better ranking compared to last week when the Greenback found itself at the very bottom of the heap.
Anyhow, U.S. data during the week was actually mostly good. What really put the hurt on the Greenback, however, was U.S. politics. If we strip GBP/USD from the overlay of U.S. pairs, we can see that the Greenback started its southbound journey during Tuesday’s early Asian session.
So what happened then? Well, that’s actually a silly rhetorical question on my part since I already marked the chart. But just play along, m’kay?
Anyhow, as noted in Tuesday’s Asian session recap and as marked on the chart above, news began to spread that the GOP’s most recent attempt to repeal and replace Obamacare was a failure, which was taken by the market as a negative sign for Trump’s fiscal stimulus plans, according to market analysts. And so the Greenback tumbled pretty much across the board.
The Donald was quick to chime in of course.
We were let down by all of the Democrats and a few Republicans. Most Republicans were loyal, terrific & worked really hard. We will return!
— Donald J. Trump (@realDonaldTrump) July 18, 2017
Moving on, the Greenback had a more mixed performance on Wednesday before getting another bearish kick during Thursday’s U.S. session. And that was apparently due to reports that cited an unnamed source (i.e. a rumor) that Special Counsel Robert Mueller will supposedly expand his investigations into the Trump campaign’s alleged business connections to Russia to include not only the alleged deals involving Kushner, Trump Jr., and Manafort, but even The Donald himself, which once again cast doubt on The Donald’s growth-oriented agenda and pushed the Greenback lower.
In short, the Greenback ignored data and got a beat-down this week because of U.S. politics. The U.S. political drama still has a long runtime it seems.
The New Zealand Dollar
The Kiwi was the third best-performing this week. But as you can all see, the Kiwi actually had a poor start because of the miss in New Zealand’s Q2 CPI (0.0% vs. 0.2% expected, 1.0% previous). However, the Kiwi quickly recovered when GOP’s healthcare bill failed, which likely hurt expectations for a rate hike as well, thereby putting interest rate differentials back into play. After that, the Kiwi began trading roughly sideways before climbing higher starting on Thursday.
I noted in Thursday’s London session recap that the higher-yielding Kiwi was trekking higher and was the best-performing currency ahead of the ECB presser because of the risk-on vibes at the time.
However, risk aversion made a comeback after the ECB presser because the euro’s surge took its toll on European exporters while Trump-related rumors spoiled risk sentiment in U.S. markets. Even so, the Kiwi continued to trend higher and continued to do so on most pairs until the week came to a close, even though risk aversion persisted on Friday. What’s up with this wonky price action, yo?
Well, the main driver for the Kiwi’s price action appears to be the same as last week – bond yields. And if we invert the overlay of Kiwi pairs and slap on a line chart of the benchmark German and French 10-year bond yields (both black lines), we can see that Kiwi pairs appear to be tracking bond yields for the most part.
Basically, the rationale for the Kiwi’s relationship to bond yields is that higher bond yields means that the Kiwi’s yield advantage is diminished, making the Kiwi less attractive. But if bond yields fall, then the Kiwi regains its yield advantage, which makes the Kiwi more attractive, pumping up demand for the Kiwi in the process (obviously).
Hmm. I guess this means that the yen isn’t the only currency that’s getting pushed around by bond yields anymore, although the yen is generally more sensitive to U.S. bond yields while the Kiwi appears to take cues from global bond yields.
It also makes sense that NZD/JPY saw the least weekly volatility since both the Kiwi and the yen were taking cues from bond yields. Unfortunately for the yen, interest rate differentials don’t work in favor of the lower-yielding yen. Also, the yen had to contend with the BOJ statement. More on that when we get to the yen.
Oh, as noted in Friday’s Asian session recap, the Kiwi also got a boost on Friday when New Zealand Finance Minister Steven Joyce hinted that he was cool with the Kiwi’s recent rise when he said the following:
“I am just saying that the New Zealand economy and New Zealand businesses are performing very well at these current [exchange rate] levels.”
The Canadian Dollar
The Loonie had a reversal of fortune this week since it was the third worst-performing currency of the week after being a top performer for the past couple of weeks.
And while we can take the lazy route by pointing to the slide in oil prices this week, price action would say otherwise since oil was on the rise for most of the week before plunging hard on Thursday and Friday, due to reports that OPEC’s oil output is on the rise.
- U.S. WTI crude oil (CLG6) down by 1.98% to $45.62 per barrel for the week
- Brent crude oil (LCOH6) down by 2.11% to $47.88 per barrel for the week
And as you can see on the overlay of Loonie pairs and oil, the Loonie did somewhat track oil prices and even tanked when oil began to slide on Thursday. However, the Loonie’s performance during all this time was a bit more mixed and messy. From this we can infer that the Loonie was vulnerable to opposing currency price action.
As to why that is, there’s no clear answer, although it is possible that Loonie traders were waiting for Canada’s retail sales and CPI reports for further signs that the BOC was right in voting for a rate hike last week.
Speaking of Canada’s retail sales and CPI reports, they were both better-than-expected. Well, the headline readings for both at least since core retail sales printed a miss. However, the very likely reason the Loonie found buyers on Friday when oil suffered the bulk of its losses is that two of the BOC’s preferred measures for the core reading were able to print an increase.
To be more specific, the weighted median CPI picked up from +1.5% to +1.6%, putting an end to four consecutive months of ever weaker readings.The common component CPI, meanwhile, ticked higher to 1.4% after holding steady at 1.3% for five consecutive months. As for the trimmed mean CPI, it held steady at 1.2% after sliding for four consecutive months.
Given all that, it looks like the BOC made the right call in voting for a hike, and so the Loonie just shrugged off the plunge in oil prices on Friday. That was not enough to save the Loonie from being a net loser this week, though. But it sure makes you wonder how the Loonie will fare next week, huh?
The Japanese Yen
The yen had yet another mixed performance this week, but the yen was still roughly tracking bond yields for the most part. And since bond yields were down for the week, the yen was able to come out a net winner yet again.
As to why bond yields were in the red this week, bond yields took a big hit on Tuesday because of worries related to the GOP’s healthcare bill failure, market analysts say. And according to market analysts, bond yields then took more hits on Thursday and Friday because of ECB Overlord Draghi’s cautious statement during the ECB presser that (emphasis mine):
“If the outlook becomes less favourable, or if financial conditions become inconsistent with further progress towards a sustained adjustment in the path of inflation, we stand ready to increase our asset purchase programme in terms of size and/or duration.”
The underlined part refers to tighter financial conditions. And the most obvious example of that in this case is higher bond yields.
Going back to the yen, there were actually two instances of divergence during the week, which means that the yen was vulnerable to opposing price action.
As for details on the divergences, most yen pairs were tracking bond yields on Tuesday, with the exception of AUD/JPY and NZD/JPY. This was likely due to interest rate differentials since expectations for a Fed rate hike apparently took a hit because of the failure of the healthcare Bill, which benefitted the higher-yielding Aussie and Kiwi. And for the Aussie’s part, it also got an extra boost from the RBA minutes.
The other case of divergence was on Thursday. This time, it was more widespread since EUR/JPY, CHF/JPY, AUD/JPY, and NZD/JPY refused to play along. This was due to the ECB presser giving euro and Swissy a boost while Trump-related worries likely put interest rate differentials into play in favor of the Kiwi and the Aussie again.
Also, the yen apparently got hurt by the BOJ statement. Well, it was more of a slap on the wrist to be more honest, since the immediate impact on the yen’s price action was only minimal. Still worth reporting, though. By the way, Forex Gump has a write-up on that, so read his work here, if you’re interested.
The gist of it, though, is that the BOJ was forced to downgrade its CPI forecasts (again) but upgraded its growth forecasts due to expectations that government and private investment would pick up because of the 2020 Olympic Games in Tokyo (Banzai!), as well as expectations that exports would pick up. More importantly, the BOJ affirmed that it would continue with its QE program while retaining its easing bias. Although the BOJ was quick to admit that it sees no need to ease further for now.
The Australian Dollar
Most Aussie pairs offered decent two-way action this week, which would have pleased many short-term traders, although longer-term traders are probably gnashing their teeth about now.
Anyhow, the Aussie started the week by ignoring the rise in iron ore prices, probably because Aussie traders were worried about the RBA minutes.
Fortunately for Aussie bulls, the RBA minutes were very upbeat overall. RBA members, for example, noted that “the strength of recent labour market data had removed some of the downside risk in the Bank’s forecast of wage growth.” Also, “The most recent Australian and state government budgets suggested that fiscal policy would be more expansionary in 2017/18 than had previously been expected.” Moreover, “The terms of trade had increased again in the March quarter, to be nearly 25 per cent higher over the prior year.”
Furthermore, there was a lot of discussion about the neutral rate, which market analyst say was interpreted by the market as a sign that the RBA may be looking to hike soon.
Despite all that (and more), the RBA still tried to paint a neutral picture, though. For instance, the minutes noted that RBA members think that “there were still risks to consumption growth should household income growth remain subdued, particularly given the high levels of household debt.” Also, “developments in the labour and housing markets continued to warrant careful monitoring.”
Aussie bulls were apparently only interested in the RBA’s upbeat rhetoric, though. Also, rate hike differentials were likely working in favor of the higher-yielding Aussie (and Kiwi) at the time because Fed rate hike expectations wobbled when the GOP’s healthcare bill failed.
Moving on, the Aussie managed to settle down by the time Tuesday’s U.S. session rolled around, so it began tracking iron ore prices again. The Aussie’s price action then became mixed on Thursday, even though iron ore prices were in decline. Apparently, interest rate differentials were working in favor of the Aussie (and the Kiwi) again because of Trump-related worries. However, the ECB presser allowed the lower-yielding euro and Swissy to give the higher higher-yielding Aussie a run for its money.
After that, iron ore prices steadied during Friday’s Asian session. However, RBA Deputy Governor Guy Debelle effectively squashed rate hike expectations when he said the following in a speech to the Committee for Economic Development of Australia:
“There was a discussion of the neutral rate at the most recent Board meeting, as detailed in the minutes of the meeting released earlier this week. No significance should be read into the fact the neutral rate was discussed at this particular meeting.”
As mentioned earlier, the minutes mentioned the neutral rate a lot, and market analyst say that this discussion was taken as a sign that the RBA may be making a move soon. The fact that Debelle (the devil, if you’re an Aussie bull) blatantly waved that off was therefore Debelle’s way of telling the market that it’s wrong and that no rate hike is coming.
Also, Debelle took the opportunity to talk down the Aussie when he said the following:
“[W]hile an easier monetary policy elsewhere in the world should lead to faster growth in the world economy, which is good for the Australian economy, an appreciating exchange rate works against this.”
Anyhow, iron ore prices later resumed sliding after that. And most Aussie pairs followed suit.