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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.

Kiwi bashing was very clearly the main theme this week, given that 7 out of the top 10 movers are Kiwi pairs, with the Kiwi losing across the board. Another major theme was Greenback resilience. So, what drove forex price action this week?

But before that, here’s this week’s scoreboard.

And 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

Overlay of USD Pairs: 1-Hour Forex Chart
Overlay of USD Pairs: 1-Hour Forex Chart

The Greenback’s winning streak ended last week. However, the Greenback managed to get back on its feet this week and even ended up as the one currency to rule them all.

The Greenback had a wobbly start but demand was clearly there and so the Greenback trended higher from Monday to Wednesday. And according to market analysts, the Greenback’s strength was due to higher U.S. bond yields.

And the rise in U.S. bond yields, in turn, reflected speculation that Trump may choose a more hawkish Fed Chair to replace Yellen, as well as renewed faith in Trump’s tax reform plans ahead of the U.S. Senate’s vote on the 2018 fiscal budget blueprint.

The Greenback later started giving back its gains (except against the yen) during Wednesday’s U.S. session, though, apparently as a bearish reaction to the disappointing U.S. housing data, with building permits only increasing by 1.22 million (1.25M expected, 1.27M previous) and housing starts only growing by 1.13 million (1.18M expected, same as previous).

However, unwinding by Greenback bulls was a possibility as well since the U.S. Senate was expected to vote on the 2018 fiscal budget. And as it turns out, the U.S. Senate, via a 51-49 vote, decided in favor of the budget blueprint.

This is a small but crucial step towards pushing forward Trump’s tax plans, market analysts say, because the approved budget proposal includes a legislative tool known as “budget reconciliation.”

To put it simply, “budget reconciliation” is a process meant to prohibit filibustering and limit procedural obstacles. Budget reconciliation also allows the Senate to quickly pass legislation on spending and revenue via a simple majority (51 votes out of 100) instead of the usual 60 votes. And remember, Trump’s Republican Party currently controls 52 seats.

Of course, there’s still a risk that Trump’s tax plans may fail if there’s infighting within the Republican Party itself. But needing only 51 votes instead of 60 votes does mean that Trump doesn’t have to depend on appealing to Democrats (who hate Trump with a passion), which make it much easier for Trump to push through with his tax plans.

And that’s why the Greenback jumped higher across the board and continued to find buyers on most pairs after the news hit the wires that the U.S. Senate voted to pass the budget blueprint.

By the way, word on the wire is that Trump has narrowed his choices down to either Powell or Taylor as the next Fed Chair. And if you still have no idea on who these two are or what they’re about, you can read more about them in this Reuters article.

The Euro

Overlay of EUR Pairs: 1-Hour Forex Chart
Overlay of EUR Pairs: 1-Hour Forex Chart

The euro had a good run and was this week’s second best-performing currency. Interestingly enough, however, commentaries on the euro’s strength were few and far between, likely because the major events/catalysts for the euro this week were negative, but the euro just soldiered on.

Anyhow, the euro was initially mixed while trading roughly sideways before beginning to tilt broadly higher during the later half of Wednesday. There were two major events on Wednesday, but neither are bullish for the euro. In fact, one of them is outright bearish.

The first event was ECB Overlord Draghi’s speech. Draghi didn’t really talk about the euro and he only had the following to say on monetary policy:

ECB research finds no convincing evidence that high interest rates lead to more reforms, if one controls for the business cycle and other factors. In fact, the opposite is more likely to be true: lower rates tend to promote reforms, since they lead to a better macroeconomic environment.”

Do note that Draghi is presenting an observation here, not giving forward guidance on monetary policy. So while his statement sounds dovish, it’s actually neutral.

Moving on, the other major event was Spain’s ultimatum to Catalonia, giving Catalonia 24 hours until 8am GMT the following day to officially cease its bid for independence from Spain.

This event is clearly bearish for the euro since it reignited political uncertainty, which is why the euro reacted negatively when Spain gave its ultimatum on Wednesday and again on Thursday when Catalonia refused to bow to Spain’s demands, causing Spain to declare that it will trigger Article 155 of the 1978 Spanish Constitution in order to strip Catalonia of its autonomy and allow Spain to legally impose direct control.

However, the euro began getting buyers a couple of hours after Spain gave its ultimatum. Also, the euro quickly recovered after Spain announced that it will trigger Article 155.

In fact, the rally from Wednesday till Thursday is when the euro harvested the bulk of its gains on most pairs.

Again, there weren’t any major positive catalysts for the Euro Zone during this period, so commentary on the euro’s strength was hard to come by. Although some market analysts think that the euro’s strength from Wednesday to Thursday was due to preemptive positioning ahead of next week’s ECB statement on the expectation that the ECB may announce a future taper on its QE program.

Having said that, make sure to keep an eye on the euro next week since it’s highly likely that the ECB statement will give the euro a volatility boost.

The Pound Sterling

Overlay of GBP Pairs: 1-Hour Forex Chart
Overlay of GBP Pairs: 1-Hour Forex Chart

The pound was a net winner again this week. Although it should be pointed out that the pound was a net loser till Thursday but was able to snatch victory from the jaws of defeat because of conciliatory Brexit-related rhetoric on Friday. The pound couldn’t recover enough again the euro and the Greenback, however.

Anyhow, the pound had a choppy start before getting kicked lower across the board on Tuesday because of not-so-hawkish rhetoric from BOE officials.

To be more specific, BOE’s Carney, Tenreyro, and Ramsden were grilled by the U.K. Treasury Select Committee on Wednesday.

Dave Ramsden testified first and he explicitly stated that he’s a dove who doesn’t believe the BOE should hike “in the coming months” because “Despite continued robust growth in employment there is no sign of second-round effects onto wages from higher recent inflation.”

Silvana Tenreyro testified after Ramsden. And while she revealed that she’s a hawk when she said that “My view is that we are approaching a tipping point at which it would be necessary or justified to remove some of that stimulus,” Tenreyro also clearly communicated that she’s a very cautious hawk when she said that a rate hike “is very contingent on the data,” before saying that wage growth has been weak and that she’s wary of voting for a rate hike prematurely since that may lead to rate cuts later.

Finally, BOE Guv’nah Mark Carney also showed his hawkish feathers by repeating the BOE’s forward guidance that a rate hike may be appropriate “in the coming months,” but he also showes some cautiousness when he talked about how Brexit uncertainty has dampened business investment in the U.K., resulting in weaker productivity growth.

Moreover, Carney’s assessment on the main driver for the rise in inflation wasn’t very flattering since “The sole reason that inflation has gone up as much as it has is the depreciation of sterling,” according to Carney.

Incidentally, the U.K.’s CPI report for the September period was released before the BOE members began to testify. And the headline reading printed a +3.0% year-on-year increase (+2.9% previous), which is in-line with expectations and is the strongest reading in five-and-a-half years and met expectations to boot.

More importantly for rate hike expectations, September’s annual reading of +3.0% was better than the BOE’s forecast of +2.8%, as laid out in the August Inflation report.

However, the pound’s bullish reaction to the CPI report was short-lived, likely because forex traders were more focused on what the BOE officials had to say.

Moving on, the pound jumped higher as a knee-jerk reaction to the U.K.’s latest jobs report because the jobless rate for the three months to August held steady at 4.3%, which is lowest reading since comparable records began in 1971.

Also, nominal average weekly earnings (bonuses included) increased by 2.2% year-on-year in August, accelerating from the previous month’s 1.7% increase.

Even better, if the 2.7% increase in bonuses is stripped, regular wages still increased by 2.2% year-on-year in August, which is a tick faster compared to the previous month’s 2.1%.

Sadly, total real earnings (inflation is taken into account) dropped by 0.5%, which marks the fifth month of negative real wage growth. Although it’s worth pointing out that the drop in real earnings during the August period was softer compared to July’s 0.9% slide.

Anyhow, sellers were quick to jump in after the initial knee-jerk reaction, so the pound’s would-be rally was cut short. Bulls continued to fight back, though, and so the pound ended up mixed for the day.

After that, the pound’s price action steadied ahead of the U.K.’s retail sales report.

And while the pound did get slapped lower when the retail sales volume in the U.K. was revealed to have contracted by 0.8% in September, which is a much sharper contraction compared to the -0.2% consensus, as well as the first contraction after four months of increases, it’s quite interesting that the pound’s slide almost an hour before the retail sales report was released.

There were no other negative catalysts. But then again, I have been noting in the past that the pound does tend to move ahead of the retail sales report, so much so that some market analysts think that there may be leaks.

Going back to the retail sales report, retail sales volume for all of Q3 is still actually roughly 0.6% higher compared to all of Q2, so retail sales will still likely have a positive contribution to Q3 GDP growth, which is likely why pound bulls tried to fight back, limiting the pound losses.

At this point, I just wanna point out that the pound was on course to finishing as the second weakest currency of the week by Thursday.

Luckily for pound bulls, Friday was a most auspicious day for the pound since we got a slew of Brexit-related speeches and their overall message was conciliatory, which likely helped to ease Brexit-related jitters quite a bit since the pound rebounded with a vengeance (and then some).

The pound wasn’t able to fully recover against the euro and the Greenback, though, which is why the pound was only the third best-performing currency of the week.

As for details, German Chancellor Angela Merkel said the following with regard to the Brexit negotiations:

“As far as I am concerned, I don’t hear any reason to believe that we are not going to be successful”

Merkel then said the following:

“[I]n contrast to what you hear in the British press, the [Brexit negotiation] process is moving forward step by step.”

“You get the impression that after a few weeks you already have to announce the final product, and I found that — to be very clear — absurd.”

For her part, British Prime Minister Theresa May said that while there is “difficulty” in the Brexit negotiations process, “There is increasingly a sense that we must work together to get to an outcome we can stand behind and defend to our people,” which is a clearly conciliatory tone.

Lastly, European Council President Donald Tusk announced on Friday that the “green light” has been lit on phase two of the Brexit talks, which refers to E.U.’s plans for post-Brexit trade negotiations with the U.K. No details yet, but it does show that the E.U. conciliatory in nature.

The Swiss Franc

Overlay of CHF Pairs: 1-Hour Forex Chart
Overlay of CHF Pairs: 1-Hour Forex Chart

The euro is the second strongest currency of the week while the Swissy had a mixed performance and a net loser to boot. So, are the Swissy and the euro still dancing in tandem?

Yes, but there was a noticeable decoupling on Wednesday since the euro climbed higher but the Swissy was reluctant to follow.

USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart
USD/CHF (inverted, red) vs.  EUR/USD (black): 1-Hour Forex Chart
GBP/CHF (inverted, red) vs.  EUR/GBP (black): 1-Hour Forex Chart
GBP/CHF (inverted, red) vs.  EUR/GBP (black): 1-Hour Forex Chart

As mentioned in the discussion on the euro, the euro just shrugged off the spat between Catalonia and Spain supposedly because of preemptive positioning ahead of the ECB statement.

The Swissy did try to follow the euro higher but the Swissy was apparently more vulnerable to the risk-on vibes at the time.

And evidence for this can be clearly seen in the divergence (and not just decoupling) between the Swissy and the euro’s price action against the higher-yielding Aussie.

The Swissy was also able to rapidly close the gap on Thursday when risk aversion returned. However, the Swissy and the euro parted ways again on Friday when risk appetite made a comeback.

AUD/CHF (inverted, red) vs.  EUR/AUD (black): 1-Hour Forex Chart
AUD/CHF (inverted, red) vs.  EUR/AUD (black): 1-Hour Forex Chart

The Japanese Yen

Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart
Overlay of Inverted JPY Pairs & US10Y Bond Yield (Black Line): 1-Hour Forex Chart

After signs of decoupling from bond yields during the past couple of weeks, yen pairs appeared to be taking directional cues from bond yields again, as can be seen in the overlay of inverted yen pairs and the benchmark 10-year U.S. bond yield.

And since bond yields rose during the week, the yen found itself getting weighed down, ending up as the second worst-performing currency of the week.

As to why bond yields rose, market analysts attributed that to a slew of reasons which include expectations that the ECB may announce a taper to its QE program in next week’s ECB statement, renewed faith in Trump’s tax plans, and the possibility that a more hawkish person may replace Fed Head Yellen, as well as Chinese President Xi Jinping’s speech, which was viewed as supportive of further growth in China.

The Canadian Dollar

Overlay of CAD Pairs & Crude Oil (Black Line): 1-Hour Forex Chart
Overlay of CAD Pairs & Crude Oil (Black Line): 1-Hour Forex Chart

Oil had another good run this week, but like last week, the Loonie ended up being a net loser.

  • U.S. crude oil up (CLG6) by 0.49% to $51.70 per barrel for the week
  • Brent crude oil up (LCOH6) by 1.17% to $57.90 per barrel for the week

Unlike last week’s chaotic price action, however, the Loonie’s price action this week was roughly uniform.

Overlay of CAD Pairs: 1-Hour Forex Chart
Overlay of CAD Pairs: 1-Hour Forex Chart

Oil climbed higher when the new trading week started but the Loonie was on the back foot, apparently as a bearish reaction to a Bloomberg report that cited unnamed “officials familiar with the [NAFTA] negotiations” as saying that the parties involved (namely the U.S., Canada, and Mexico) likely won’t be able to come to an agreement December of this year and that “talks are likely to drag on for months.”

Moreover, the unnamed sources claimed that there was “essentially no progress on the most divisive U.S. proposals,” even as the fourth round of NAFTA talks began on Monday.

The Loonie found support and began trading broadly higher on Tuesday after the parties involved in NAFTA talks announced that they agreed to extend negotiations until the first quarter of next year.

And according to market analysts, this bullish reaction was due to relief buying after the Loonie reached key technical levels.

The Loonie then got another bullish boost on Wednesday, apparently as a reaction to Canada’s monthly survey of manufacturing which revealed that sales volume in Canada’s manufacturing sector surged by 1.2% in August, which is a nice recovery after the previous month’s 2.6% drop and contrary to expectations for a 0.1% slide.

After that, the Loonie steadied before sliding on Thursday. There were no negative catalysts on Thursday, so it looks like the Loonie took cues from the slide in oil prices at the time.

The Loonie then appeared to continue taking directional cues from oil during Friday’s Asian session but decoupled during the morning London session, likely because traders were waiting for Canada’s retail sales and CPI report.

And as it turns out, Canada’s headline CPI increased by 0.2% month-on-month in September, missing expectations for a +0.3% rise (+0.1% previous).

Year-on-year, CPI increased by 1.6%, also missing expectations for a 1.7% increase (+1.4% previous), although one of the BOC’s three preferred measures for underlying inflation did tick higher at least.

As for Canada’s August retail sales report, it showed that headline retail sales fell by 0.3% month-on-month instead of rising by 0.5% as expected (+0.4% previous).

Worse, 8 of the 11 retail store types reported declines in sales, which is why the core reading slumped by 0.7% instead of increasing by 0.3% as expected (+0.2% previous).

And since another BOC statement is coming up next week, it’s quite understandable why the bearish reaction to the disappointing top-tier economic reports was rather strong.

The Australian Dollar

Overlay of AUD Pairs & Gold (Black Line): 1-Hour Forex Chart
Overlay of AUD Pairs & Gold (Black Line): 1-Hour Forex Chart

The Aussie had a mixed performance this week. And since the Aussie’s price action was rather messy, with lots of diverging price action, and since only AUD/USD was clearly taking directional cues from gold, we can probably safely say that opposing currencies dictated price action on Aussie pairs.

As to why the Aussie was vulnerable to opposing currency price action this week, there’s no clear reason for that. Although it’s possible that the Aussie tried to track the slide in gold prices, but Aussie bulls came to the Aussie’s defense because of the prevalence of risk appetite this week.

After all, the Aussie is considered a higher-yielding currency and the Kiwi was out of commission because of New Zealand politics.

Well, that’s just my personal opinion anyway. But that opinion does seem plausible, given that the Aussie won out against the safe-havens yen and Swissy.

Anyhow, there were two top-tier catalysts for the Aussie this week. The first one was the RBA’s meeting minutes, but that was mostly a dud since the RBA’s message was pretty similar to its initial statement.

To be more specific the RBA maintained its positive growth outlook, saying that the “effect of the decline in mining investment had mostly passed” and that “growth in public demand and non-mining business had picked up.

The RBA also reiterated that while “slow growth in real wages and high levels of household debt” will likely constrain household spending, wage growth is also expected to “increase gradually,” which will “contribute to a gradual rise in inflation over time.

And as usual, the RBA repeated its warning that:

“The appreciation of the Australian dollar since mid 2017, partly reflecting a lower US dollar, was expected to contribute to ongoing subdued price pressures.”

 

“A material further appreciation of the exchange rate would be expected to result in a slower pick-up in economic activity and inflation than currently forecast.”

Moving on, the other major catalyst for the Aussie was Australia’s September jobs report, which showed that the Australian economy generated 19.8K jobs in September, which is more than the consensus for a 15.0K increase.

The details of the jobs report were also positive since full-time jobs increased by 6.1K while part-time jobs increased by 13.7K. Moreover, the unemployment rate dipped from 5.6% to 5.5%, which is the best reading since May. And it’s a healthy dip since the labor force participation rate held steady at 62.7%.

Overall, Australia’s jobs report was positive, which is why the Aussie jumped higher across the board. However, the Aussie quickly fell victim to opposing currency price action, resulting in a more mixed and messy performance.

By the way, Australia’s quarterly CPI report will be released next week, so we’ll hopefully get more uniform price action from the Aussie, or some decent volatility at least.

The New Zealand Dollar

Overlay of NZD Pairs: 1-Hour Forex Chart
Overlay of NZD Pairs: 1-Hour Forex Chart

The Kiwi got a very severe pounding and ended up as this week’s worst-performing currency. And as I warned y’all in last week’s recap, the Kiwi’s price action was driven mainly by New Zealand politics.

New Zealand released its better-than-expected Q3 CPI reading (+0.5% vs. +0.4% expected, +0.0% previous) on Monday. And the Kiwi reacted by only jumping slightly, which was an early sign that politics will drive the Kiwi’s price action again. After all NZF’s Peters said last Friday that the party board and caucus will be meeting on Monday and may finally be able to come to a decision before the end of the week.

The Kiwi then traded roughly sideways as forex traders waited for NZF’s decision on who to back before starting to find some bearish pressure when NZF Leader Winston Peters said on Wednesday that he will be able to make “an announcement on the result of negotiations” between NZF, National, and Labour by Thursday.

And when Thursday finally came, NZF announced that it would be backing Labour, not the status quo National Party. And that really opened the gates for the Kiwi bears to rush in since the decision stoked fears that a Labour-Greens-NZF Grand Coalition will likely adopt policies that may be good for the average New Zealander, but not so friendly towards investors, especially foreign investors.

This fear was really driven home when NZF’s Peters said during his announcement that:

“Far too many New Zealanders have come to view today’s capitalism, not as their friend, but as their foe.”

Aside from fears that New Zealand may adopt protectionist policies, there were also fears that the RBNZ’s path to hiking by late 2019 may be delayed since Labour has said in the past that it wants the RBNZ to follow the Fed’s model and include full employment as part of its mandate (among other changes).

NZF, for its part, also wants the same and then takes this a step further because NZF wants a complete overhaul of the RBNZ, as well as controlling the Kiwi’s strength as part of its mandate, although word on the street is that Labour didn’t agree to that last bit about targeting the currency.

Anyhow, this dual fear for a possibly protectionist New Zealand and an RBNZ overhaul is why the bearish reaction to NZF’s decision to back Labour was so strong. I’m not complaining, though. Woo hoo!