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?
Looking at the list of top movers, we can see that 7 out of the top 10 movers are Swissy pairs, with the Swissy on the losing end in all of ‘em. Severe Swissy weakness was therefore a major theme this week.
Another theme that you’ll also see later is that most of the other currency pairs only had limited movement and many were even roughly trading sideways. Heck, just look at how small the weekly percentage changes are on pound pairs. And do consider that the pound was this week’s best-performing currency (for what it’s worth, given the small gains).
In fact, the Swissy was the only real mover during the week, although the Greenback was also arguably made some decent moves. Also, the Greenback’s uniform price action was clearer at least.
It’s not clear what the wonky volatility and price action were all about. Some market analysts were pointing to thin liquidity. However, end-of-month flows may also be a factor. After all, hedge funds, mutual funds, pension funds, and other large players usually rebalance their portfolios and/or prepare to make cash distributions at the end of the month.
Anyhow, time to discuss how the various currencies and what likely moved them.
The Pound Sterling
The pound was the best-performing currency this week, although the pound’s gains were actually rather small on most pairs. In fact, only two pound pairs exceeded the 1% mark in terms of weekly % change.
Anyhow, market analysts attributed the pound’s gains this week to easing Brexit-related jitters, which is the opposite to last week when the pound was weighed down by renewed concerns of a so-called “hard” Brexit.
And easing Brexit-related jitters apparently overpowered reduced expectations for a more hawkish BOE statement next week because of poor U.K. Q2 GDP.
Sure, the preliminary readings were within expectations (+0.3% quarter-on-quarter, +1.7% year-on-year). However, it should be noted that the quarter-on-quarter reading of 0.3% is a tick slower than the BOE’s staff forecast of +0.4%, as laid out in the May Inflation Report. And that may make BOE hawks (and would-be hawks) think twice about voting for a rate hike next week.
As for specifics on what caused Brexit-related jitters to ease a bit, Britain’s Environment Secretary, Michael Gove, told BBC Radio on Wednesday that the U.K. should “take as pragmatic an approach as possible” when it comes to Brexit, which is why Gove said that he’s okay with the E.U.’s for open and free migration, which Gove says will be “consistent with ensuring access to the talent we need in agriculture and other areas and give business the confidence that it needs to plan.”
In addition, Gove said that he’s fine with the European Court of Justice as the final arbiter when there are disputes during Brexit negotiations, which would help smoothen the Brexit negotiation process.
U.K. finance minister Philip Hammond expressed similar views against a “hard” Brexit and in favor of a so-called “soft” Brexit during a BBC interview, also on Wednesday.
After that, rumors began to spread on Thursday that Hammond supposedly wants a transition deal after Brexit negotiations are concluded by April 2019 in order to avoid a “cliff edge” and provide certainty to business and investors. And U.K. trade minister Liam Fox supposedly agrees with Hammond and the same can be said of their E.U. counterparts. These rumors apparently fueled demand for the pound.
And on Friday, Hammond told BBC Radio that:
“There will be a process between the date we leave the European Union and the date on which the new treaty-based arrangements between the UK and the European Union which we hope and expect to negotiate come into force.”
“I can’t tell you a precise period of time because we haven’t had that discussion yet. It will be driven by technical considerations, how long it will take us to put the necessary arrangements in place. People have talked about a year, two years, maybe three years”
“I think there is a broad consensus that this process has to be completed by the scheduled time of the next general election, which is in June 2022, so a period of at the most three years in order to put these new arrangements in place and move us on a steady path without cliff edges from where we are today to the new long-term relationship with the European Union.”
In short, Hammond confirmed earlier rumors that there will likely be a three-year transition period after Brexit negotiations are done by 2019. During this transition period, the U.K. will still be part of the E.U. single market, the U.K. can not strike trade deals independently, and free movement of people would still be place.
In other words, everything will be pretty much the same until 2022. This may irritate the pro-Brexit crowd, but this gave businesses and investors some relief. Well, that’s what market analysts are saying anyway.
The Swiss Franc
The Swissy had a major reversal of fortune since it was the biggest loser this week after being last week’s champ.
I first noted the Swissy’s weakness in Wednesday’s London session recap. But as you can see, the Swissy’s weakness actually started on Tuesday. And risk sentiment was likely in play risk-taking was the name of the game on Tuesday and Wednesday.
However, risk aversion made a major comeback on Thursday and then persisted into Friday. And strangely enough, the Swissy’s weakness only intensified, so much so that the Swissy and the euro failed to dance in tandem for the first time in many months, as you can see below.
As to why the Swissy was super weak this week, market analysts have varying views. Some market analysts pointed to technical breakouts and the expected monetary policy divergence between the ECB and SNB, since the ECB has been signaling that it may start to tighten policy sooner or later while the SNB has been stressing that it has no plans to tighten.
Other market analysts, meanwhile, pointed to yen buying against the Swissy and strong demand for the euro from Japanese banks in a low-liquidity environment, which caused the Swissy to weaken swiftly and then weaken some more when stops got triggered.
There were also some market analysts who pointed to rebalancing by quants-based, model-driven funds. In other words, they’re saying that “the algos did it.”
Aside from all of those, analysts with longer-term views argue that the safe-haven trade on the Swissy is finally starting to unwind. These analysts were, of course, referring to this:
To the forex newbies out there, the SNB used to have a “floor” on EUR/CHF. However, intense safe-haven demand for the Swissy because of the European debt crisis ultimately forced the SNB raise the white flag of defeat and remove that “floor” on January 15, 2015, a date that will live in infamy.
This opened the floodgates for Swissy buyers and caused the Swiss franc to appreciate across the board tremendously. And in just one day, mind you.
And since then, the SNB has been saying that the Swissy is “significantly overvalued” and began implementing its currency intervention operations (*cough* currency manipulation *cough*) in order to try and push the Swissy lower, especially against the euro.
Speaking of the SNB, SNB intervention is also a possibility, although the SNB refused to comment on whether or not it was responsible for the Swissy’s weakness this week.
Anyhow, whatever really caused the Swissy to weaken really hard this week, the fact still remains that Swissy IS the biggest loser this week, even though most of the other currencies only saw limited volatility.
The Australian Dollar
The Aussie was the second best-performing currency this week. Like the pound, however, the Aussie’s weekly gains were rather cute.
As to why the Aussie had a good run, that was due to the iron ore rally this week, as well as the FOMC statement.
The iron ore rally is pretty self-explanatory: iron ore is Australia’s main commodity export, so higher iron ore prices are good for the Australian economy, which is why the Aussie tends to track iron ore prices.
As for the FOMC statement, that was good for the Aussie because it lowered expectations for a Fed rate hike, which put interest rate differentials into play in favor of the higher-yielding Aussie.
Also, risk-taking was the name of the game on Monday and Tuesday, which is also a good environment for the higher-yielding Swissy.
The Aussie did encounter a couple of speed bumps along the way, though.
The first was Australia’s Q2 CPI report since it revealed that Australia’s CPI only rose by 0.2% quarter-on-quarter, which is lower than Q1 2017’s 0.5% increase and is slower than the expected 0.4% uptick. Year-on-year, this translates to 1.9%, which is weaker than the previous quarter’s 2.1% gain.
Meanwhile, the trimmed mean CPI came in at 1.8% year-on-year, which matched the reading for Q1. However, the reading for Q1 was downgraded from 1.9%, which is also a bit disappointing.
The second speed bump was the returning risk-off vibes on Thursday, which likely prompted some profit-taking on Aussie pairs since the Aussie was broadly lower for the day, even though iron ore was able to nudge higher.
The U.S. Dollar
The Greenback was a net loser again this week. And the Greenback’s losses were due mainly to the FOMC statement.
As always, Forex Gump already has the details, so read his write-up here, if you’re interested.
The key takeaway, though, is that rate hike expectations suffered because of the Fed’s more downbeat assessment of inflation, as well as the Fed’s stronger language on its plans to start trimming its balance sheet this year.
Aside from that, the Greenback also got slapped lower during Friday’s U.S. session, apparently as a reaction to the advanced Q2 U.S. GDP report.
The reading for Q2 itself was slightly better-than-expected (+2.6% q/q annualized vs. +2.5% expected). However, as Forex Gump pointed out in his trading guide, there was a very strong historical tendency for GDP growth to accelerate in Q2, so the market probably anticipated this already.
Moreover, the GDP report was not 100% great since the reading for Q1 was downgraded from 1.4% to 1.2%. In addition, the labor cost index only rose by 0.5% quarter-on-quarter, missing expectations for a 0.6% rise. This is a bad sign for wage growth and, by extension, consumer spending and inflation.
Aside from that, some market analysts also attributed the Greenback’s slide on Friday to political uncertainty and renewed concerns that Trump’s pro-growth plans will be delayed further after McCain voted against the Republican Party’s so-called “Skinny Repeal” of Obamacare.
The New Zealand Dollar
The Kiwi was the third best-performing of the week yet again. And while New Zealand’s trade surplus widened in June to $242 million ($147M expected, $74M previous), that didn’t seem to have an immediate impact on the Kiwi’s price action.
Anyhow, the main reason for the Kiwi’s gains (what little there were) was apparently the FOMC statement since like the higher-yielding Aussie, lower expectations for a Fed rate hike mean that interest rate differentials work in favor of the Kiwi.
The Japanese Yen
The yen was a net loser this week, even though risk aversion was the more dominant sentiment. And that’s because bond yields rose during the course of the week. End of story. Next!
Okay, okay. I’ll give you some details.
Bond yields rose on Monday and Tuesday, according to market analysts, thanks to hopes that the Fed will sound hawkish during the FOMC statement as well as hopes that the the GOP’s replacement for Obamacare would get passed. And since bond yields were on the rise, the yen encountered selling pressure and suffered broad-based losses.
Bond yields later slumped on Wednesday, thanks to lowered rate hike expectations because of the FOMC statement. However, the yen’s price action became mixed in the aftermath of the FOMC statement, so opposing currency price action dominated yen pairs.
Bond yields rose again on Thursday. This time, however, the yen was broadly higher for the day, very likely because risk aversion was making a comeback. And as mentioned earlier when we discussed the Swissy, some market analysts pointed out that Japanese banks were buying the yen against the Swissy, which may have helped the yen as well.
After that, the yen’s price action became a mess on Friday, so opposing currencies were once again in control of yen pairs.
The Canadian Dollar
The Loonie had a mixed performance this week, even though oil prices surged on profit-taking by bears due to fading oversupply concerns, according to market analysts.
- U.S. WTI crude oil (CLG6) up by 9.65% to $49.80 per barrel for the week
- Brent crude oil (LCOH6) up by 8.80% to $52.70 per barrel for the week
And as you can see on the overlay of Loonie pairs and oil, the Loonie appeared very reluctant to track oil prices higher. The Loonie even got kicked lower on Thursday, even as oil climbed higher.
This was attributed to a Bloomberg Report (that cited unnamed sources) as saying that some officials of the Trudeau government are “concerned the Bank of Canada is moving too quickly to raise interest rates, fearing higher borrowing costs could inadvertently trigger a downturn.”
Other than that, there wasn’t really nothing else that could have sent the Loonie lower.
The Loonie did get a bullish boost come Friday, though. And that was apparently as a reaction to Canada’s monthly GDP report, which showed that the Canadian economy grew by 0.6% month-on-month in May, a much faster rate of expansion compared to consensus that it would match the +0.2% pace printed in April.
The euro was mixed for the week and its price action was also pretty mixed and messy, so opposing currencies apparently had more sway on price action across euro pairs.
However, there was a rather interesting bout of uniform price action ahead of and shortly after the inflation reports of the three major Euro Zone economies were released.
To be more specific (and to copy-paste from Friday’s London session recap), France’s HICP came in at 0.8% year-on-year in July, which is the same as the previous reading and is within expectations. Spain, meanwhile, did rather well since it reported a 1.7% year-on-year increase. This is better than the expected dip from +1.6% to +1.5%. As for Germany, its HICP came in at 1.5% year-on-year, which is the same pace as last time and beats expectations that inflation growth would ease from +1.5% to +1.4%.
All together, the inflation reports point to another solid inflation reading for the Euro Zone as a whole in July. And that likely raised expectations for a future tightening move from the ECB, which is probably why the euro rose ahead of and shortly after those inflation reports were released.