The forex trading week has come and gone, so it’s time to take a look at how the major currencies performed and what drove price action. Were you able to profit from any of this week’s top movers?
By the way, if you only want to find out what happened to a specific currency, then you can just skip to that currency by clicking on it below.
- The U.S. Dollar (USD)
- The Euro (EUR)
- The Pound Sterling (GBP)
- The Swiss Franc (CHF)
- The Japanese Yen (JPY)
- The Canadian Dollar (CAD)
- The Australian Dollar (AUD)
- The New Zealand Dollar (NZD)
Based on the table of top movers, it looks like euro strength and Kiwi weakness were the main themes this week. But what drove price action? And how about the other currencies? How did they fare this week and what drove them? Time to find out!
The euro was a major loser last week. However, the euro was able to turn the tide of battle and emerge as the one currency to rule them all this week.
The euro’s path towards total domination started early since it bolted higher across the board on Monday. There were no direct catalysts, but market analysts pointed to profit-taking by shorts after last week’s euro weakness as well as dip-buying.
The euro then ended Tuesday on a mixed note before getting bid higher again come Wednesday, thanks to Markit’s latest batch of PMI reports for Germany, France, and the Euro Zone, which were mixed but net positive overall since the Euro Zone Composite PMI reading improved marginally from 55.7 to 55.8 in August.
Commentary from Markit was also pretty upbeat, particularly the following:
“The latest PMI readings for the eurozone signal a continuation of the recent strong performance of the currency bloc’s economy. This stabilisation in the rate of expansion is pleasing, following signs of growth easing in recent months.”
After that, the euro had another mixed day on Thursday as forex traders braced themselves for the Jackson Hole Symposium.
And interestingly enough, Yellen’s Jackson Hole speech (more on that when we discuss the Greenback) caused the euro to jump higher across the board, apparently because the intense bullish pressure on EUR/USD also pulled other euro pairs higher.
The euro then got a final bullish infusion when ECB Overlord Draghi got to say his piece. And quite ironically, it’s what Draghi didn’t say that apparently caused the euro to jump higher.
You see, expectations were high that Draghi would address the euro’s strength during the past few months. And all the more so, given that the latest ECB statement revealed that “concerns were expressed about the risk of the exchange rate overshooting in the future.”
However, Draghi didn’t bother to talk about the euro and this was taken as a sign that the ECB is not yet very worried about the strong euro. Basically, a relief rally. Well, that’s what some market analysts think anyway.
By the way, Forex Gump did a quick recap of the speeches delivered by Draghi and Yellen at Jackson Hole. You can read more on that here, if you’re interested.
Also, do note that Draghi reiterated that “a significant degree of monetary accommodation is still warranted” because “We have not seen yet the self-sustained convergence of inflation to the medium-term objective.”
While a bit dovish, this has actually been the ECB’s official forward guidance during its monetary policy statements. Also, this is not all that surprising, I suppose. After all, I did note last week that a Reuters report cited two unnamed sources who were “familiar with the situation” as saying that ECB Overlord Draghi won’t be talking about the widely anticipated shift in the ECB’s monetary policy stance.
The New Zealand Dollar
The Kiwi had a mixed performance last week and I quipped back then that it’s possible that market players were still mulling on what the latest RBNZ statement and presser mean for the Kiwi, since the RBNZ kept its neutral stance and still expects to hike the OCR by late 2019 but warned against the Kiwi’s further strength.
Well, market players finally made a decision to dump the Kiwi, thanks to the Treasury’s Pre-election Economic and Fiscal Update 2017 (PREFU), which was released on Wednesday. Although it should be pointed out that the Kiwi already began to tilt to the downside a day before that.
And as noted in Tuesday’s London session recap, this was rather weird because risk-taking was the dominant sentiment at the time, which should have supported the higher-yielding Kiwi. But in hindsight, it’s highly likely that the Kiwi’s weakness was due to pre-emptive positioning ahead of the PREFU.
Going back to the PREFU, the short of it is that compared to the forecasts from the May Budget Economic and Fiscal Update 2017 (BEFU), the forecasts for 2017-2021 GDP growth and 2017-2020 inflation presented in the PREFU were noticeably weaker.
The downgraded forecasts for GDP growth were due mainly to downward revisions for business investment and residential investment components.
And the downward revision for business investment growth, in turn, was blamed on evidence “that the supply of labour and other resources are tight and are constraining growth in activity.”
Forecasts for residential investment growth, meanwhile, were revised lower because “tighter financial conditions and higher construction costs point to a slower pace of growth than previously forecast.”
As for the downgraded inflation forecasts, that was blamed mainly on anemic wage growth. Also, there may be “some factors that may be more long-lasting, including the rapid pace of technological improvement embodied in goods and services, which may delay progress in returning inflation to the 2.0% mid-point of the Reserve Bank’s target range.”
The Swiss Franc
If you’re a regular reader, then you already know that the euro and the Swissy have been dancing in tandem this year. And if you didn’t skip the part on the euro, then you already know that the euro did rather well this week and so the Swissy quite naturally had a good run as well, even though the Swissy is a safe-haven currency and risk-taking was the more dominant sentiment during the week, based on how global equities fared.
- Shanghai Composite (SSEC) closed 1.92% higher to 3,331.52 for the week
- Hang Seng (HSI) closed 2.96% higher to 27,848.16 for the week
- Nikkei 225 (N225) closed 0.29% lower to 19,452.61 for the week
- The Euro Stoxx 50 (STOXX50E) closed 0.13% lower to 3,441.51 for the week
- The FTSE 100 (FTSE) closed 1.06% higher to 7,401.46 for the week
- The DAX (GDAXI) closed 0.02% higher to 12,167.94 for the week
- The DOW (DJI) closed 0.64% higher to 21,813.67 for the week
- S&P 500 (SPX) closed 0.72% higher to 2,443.05 for the week
- Nasdaq Composite (IXIC) closed 0.79% higher to 6,265.64 for the week
And unlike the past couple of weeks, there were no signs of major decoupling this week, as can be seen on the sample pairs below.
As to why the euro was able to win out against the Swissy, that’s apparently due to the euro demand ahead of Draghi’s speech that I mentioned earlier when we discussed the euro.
The Swissy was able to regain the initiative ahead of Draghi’s speech, but it wasn’t enough to totally overpower the euro. Also, Draghi’s speech quite naturally had a more positive impact on the euro, which gave the euro enough “oomph” to close out the week ahead of the Swissy.
The Japanese Yen
As usual, yen pairs were tracking bond yields for the most part. And since bond yields were higher for the week, the yen’s strength got sapped and so the yen ended up as the second worst-performing currency after the Kiwi.
As to what drove bond yields higher this week, market analysts say that the prevalence of risk appetite ahead of the Jackson Hole Symposium speeches lowered safe-haven demand for bonds, which caused bond yields to rise.
And with regard to U.S. bond yields, in particular, some market analysts also say that concerns over the the U.S. debt ceiling caused bond yields to rise after Trump said during his Tuesday rally in Phoenix that “If we have to close down our government, we’re building that wall,” adding that “One way or the other, we’re going to get that wall.”
Speaking of the debt ceiling, U.S. Treasury Secretary Steven Mnuchin gave assurances late on Friday that he has had “discussions with the leaders in both parties in the House and Senate and [they] are all on the same page,” adding that “The government intends to pay its debts and the debt ceiling will be raised.” No major effect on bond yields, though.
The Canadian Dollar
The Loonie was still a net winner this week, but it did get knocked down by a couple of pegs and had to content itself with third place after being the top performer last week.
And interestingly enough, the Loonie had another strong performance this week, even though oil prices were actually down for the week.
- U.S. WTI crude oil (CLG6) down by 1.74% to $47.87 per barrel for the week
- Brent crude oil (LCOH6) down by 0.64% to $52.38 per barrel for the week
This should not be a very surprising development to regular readers, though, since I did point out in last week’s recap that there were signs that Loonie pairs were decoupling from oil prices.
As to what exactly caused the Loonie to decouple this week, market analysts are still stumped, noting only that the correlation between Loonie and oil prices is beginning to slip and adding no further value to that observation.
Anyhow, based on price action, I think the most probable reason for the Loonie’s continued strength despite falling oil prices is that forex traders are expecting the BOC to hike again, with another rate hike being a clear possibility this year after last week’s upbeat Canadian July CPI report revealed that two of the BOC’s three preferred measures for core CPI ticked higher, affirming the BOC’s forecasts that underlying inflation will pick up.
And Loonie bulls got more reason to continue betting on a possible BOC rate hike this week since Canada’s July retail sales report was net positive overall.
Sure, the headline reading only showed a 0.1% increase, which missed the consensus for a 0.2% rise. However, the weaker-than-expected reading was due to mainly to weaker sales at motor vehicle and parts dealers, as well as gasoline stations.
Sales from these retail store types are considered to be volatile and are therefore stripped from the core reading. And speaking of the core reading, the other store types printed stronger sales, which is why core retail sales rebounded by a solid 0.7% instead of coming in flat as expected.
The Loonie actually started its ascent during Monday’s U.S. session after a mixed start. There were no catalysts at the time, but preemptive buying ahead of Canada’s retail sales report and/or follow-through buying after last week’s upbeat CPI reports are the most likely reasons.
Price action in the wake of the upbeat retail sales report implies that pre-emptive buying was a major reason for the Loonie’s strength since there was little follow-through buying after the initial bullish reaction to the retail sales report. But then again, Trump was threatening that he will be terminating NAFTA at the time, and that may have spooked some Loonie bulls.
Thankfully (for Loonie bulls), the Loonie later found support during Wednesday’s London session. After that, demand for the Loonie began to build and so the Loonie began the second leg of its journey to the topside when Wednesday’s U.S. session rolled around.
Demand for the Loonie was so strong that it just plowed through its forex rivals, even though there were no direct catalysts and oil suffered heavy losses on Thursday.
The Loonie’s upward push finally lost momentum come Friday and so the Loonie’s price action became more mixed. Even so, the Loonie can proudly boast that it was the best-performing currency of the week at this time.
Unfortunately for the Loonie, Yellen’s and Draghi’s respective speeches during the Jackson Hole Symposium were deliciously profitable for the euro and the Swissy. And so the euro and the Swissy were able to steal victory from the Loonie in the end. Poor, poor Loonie. Third place is still great, however. Although I bet Loonie bulls who had positions on EUR/CAD and CAD/CHF are quite miffed by this.
The U.S. Dollar
The Greenback had a bad run this week and and Greenback bulls can utter their curses on (and Greenback shorts can sing their praises to) Fed Head Yellen’s Jackson Hole speech.
Well, it wasn’t really due to what Yellen said during her speech, but more on what Yellen didn’t say.
You see, expectations were high that Yellen will try to reinforce rate hike expectations by providing a more upbeat outlook on inflation or by talking directly about monetary policy.
In fact, market analysts even attributed the Greenback’s steady rise on Tuesday partly on these expectations, although Trump’s later threats about a possible government shutdown apparently cooled broad-based demand for the Greenback after that, resulting in mixed but roughly steady price action ahead of Yellen’s speech.
Getting back on topic, Yellen did not talk about inflation and monetary policy. Instead, she talked about regulations and its positive effect on financial stability and whatnot. And this disappointed Greenback bulls who reacted by punishing the Greenback.
By the way, Forex Gump has more details on what Yellen said, if you’re really interested. They’re largely inconsequential to the forex market, but if you really want to, then you can read his write-up here.
The Australian Dollar
The Aussie had a mixed performance this week. And the same can be said of the price action across Aussie pairs, probably because iron ore prices were all over the place but ultimately went nowhere.
Also, there weren’t any major economic reports or other catalysts for the Aussie this week, but the other currencies (other than CAD) had clear drivers, which likely contributed to the Aussie’s lack of direction.
Anyhow, the Aussie’s mixed and messy price action means that the Aussie was vulnerable to opposing currency price action. It also means that the Aussie was in consolidation mode this week, so hopefully we’ll get more uniform directional movement next week.
The Pound Sterling
The pound also had a mixed performance this week. And while the pound’s price action looks kinda messy at first glance, price action was actually kinda uniform if we remove GBP/NZD’s pesky chart.
As you can see in the chart above, the pound started to tilt to the downside during Monday’s U.S. session, although this didn’t become more pronounced until Tuesday’s London session rolled around.
As to what triggered the pound’s weakness, there was no direct catalyst but market analysts were blaming the pound’s weakness on souring outlook on the U.K. economy due to Brexit.
To that I will add that Brexit-related jitters may have weighed down on the pound since the U.K. government released a series of policy papers in preparation for the third round of Brexit talks, which will begin on August 28.
Moving on, the pound’s bleeding finally stopped on Thursday. And strangely enough, the pound began to get bid higher a couple of hours before the second estimate for Q2 U.K. GDP growth was released. Whether this was due to pre-emptive buying ahead of the GDP report or profit-taking by shorts (to avoid event risk from the Jackson Hole Symposium), I’m not really sure.
Anyhow, the second estimate for GDP affirmed Q2 GDP growth at 0.3% quarter-on-quarter and 1.7% year-on-year, unchanged from the first estimate. A breakdown of GDP using the expenditure approach finally became available, and household spending only added 0.1% to quarterly GDP growth, government spending and investment added another 0.1%, and gross capital formation accounted for the remaining 0.1%.
As for the other GDP components, they had negligible contributions to GDP growth in Q2.
Among those GDP components that had negligible contribution to GDP, net trade is the most noteworthy since BOE hawks have been expecting net trade to pick up the pace to partially offset the expected weakness in consumer spending. And so far, that’s just not happening.
Anyhow, the second estimate for Q2 GDP was somewhat disappointing, which is probably why the pound’s rise stalled and later turned into a rout.
After that, the pound’s price action became a total mess, with diverging price action, which indicates that opposing currencies defined price action on the pound.
Okay, here’s this week’s scorecard: