In the US, the path towards a significant government response to any budding crisis has been significantly impeded by the 2018 mid-term election. The new Congress meets today for the first time and the spectacle of a Trump, and a Democratic House bent on taking down the president, risks a dysfunctional response when and if the US economy hits the skids.
The G-10 rundown
USD – this latest volatility event risks setting markets further on edge and the risks tilt increasingly towards the Fed eventually being forced into a change of tune. But a significant turn in the USD to the downside may not come until the Fed is well into an easing cycle – if we are to take the 2000-2003 and 2007-2009 periods as lessons for how the USD responds to Fed easing.
EUR – EURUSD looked bearish yesterday on the close, with USDJPY flows distorting the action in USD pairs overnight. Need a close below the 1.1250-15 area to get something started there. Note that authorities have suspended trading of the shares of Italy’s tenth largest bank Carige as the bank has been
put in administration by the ECB.
JPY – the yen’s immunity to risk off only began fading notably in the tail end of the year and its safe haven status has suddenly roared to live. There could be more in the move, but given that USD liquidity and not JPY liquidity is the chief source of the world’s financial market pair, I would be surprised if this move continues with anything approaching the same vehemence as this may have mostly been a liquidity and leveraged positioning-driven move.
GBP – EURGBP pulling well above 0.9000, but shying away from new JPY-flash-crash inspired highs. Sterling weakness perhaps in part down to opposition leader Jeremy Corbyn expressing reluctance to support a second referendum.
CHF - EURCHF back from beyond the 1.1200 brink as the pair seems to merely serve as a weak echo of risk-on, risk-off developments. A more profound move lower likely would require a sense that new significant immediate EU existential risks are afloat. Brexit is the most critical of these at the moment, but is not new.
AUD – the AUDUSD chart blown apart by the overnight flash crash – for now, just have to concentrate on the fact that 0.7000 has given way and we continue to fret AUD on exposure risks to China and a domestic credit crunch linked to housing.
CAD – the loonie is largely sitting out the volatility. AUDCAD still an interesting one for downside potential despite the misleading daily candlestick created by yesterday’s JPY flash crash.
NZD – flash crash overnight fed into AUDNZD – this is liquidity stress in AUD from all appearances due likely to AUDJPY flows. This creates a misleading bar on the chart.
SEK – market volatility is no friend of the krona’s. Frustrated bears will want this latest rally erased quickly or we risk limbo back in the higher range again. On the one hand, Riksbank expectations and Swedish rates are holding up well, but on the other hand, Sweden has its own issue with housing and today’s household lending data release shows the lowest year-on-year growth (at 5.7%) since 2014 as Sweden’s GDP posted a negative QoQ GDP reading in Q3. Back in 2012, a drop below 5% YoY in lending coincided with a brief Swedish recession as the Riksbank tried to normalise interest rates.
NOK – the reversal back lower in EURNOK needs to pick up pace again, otherwise the pair showing signs of comfort above the key 9.75-9.80 area and risking higher levels still if oil prices haven’t posted their cycle lows here.
Upcoming Economic Calendar Highlights (all times GMT)
0930 – UK Dec. Construction PMI
1315 – US Dec. ADP Employment Change
1330 – US Weekly Initial Jobless Claims
1500 – US Dec. ISM Manufacturing
