Macro FX trading – Q4 2019 commentary

Market overview

Market movements during the final quarter of 2019 were largely determined by the trio of the US Fed (FOMC meetings and their ongoing Repo-Liquidity management into year-end), US-China trade talks and the UK election with its Brexit implications. US yields hit aggressive summer lows at the very start of the quarter, following a weak ISM print, before retracing sharply higher on positive US-China trade developments and settling into a higher range for the remainder of Q4, as the US Fed cut rates by 25 bp at the end of the month. The resulting market stability was aided by US-China trade talks progressing towards a Phase One deal (details of the deal are taking time to emerge) and, in the UK, the Conservative party securing a significant majority after leading in the polls, averting a feared hung parliament, a far-left Corbyn government and further prolonged Brexit uncertainty. 

The partial resolution of this trio of uncertainties resulted in a very strong quarter for risk assets and commodities, steeper yield curves as long end rates pushed higher and the gradual USD selloff accelerating into the final days of the year. For FX, moves were noisy and erratic, yet delivered very low volatility as aggressive mean reversions took hold, resulting in various false breakouts. The GBP rallied into the election result, yet sold off aggressively afterwards as the market took fright at a Tory hardline message on Brexit negotiations.  The commodity currencies moved higher later in the period but lacked traction on positive risk outcomes and a higher CNH, whilst the JPY bounced sideways and the CHF actually rallied. Likewise, the euro stumbled higher during the quarter, lacking energy. 

Portfolio performance

(Performance figures are net of transaction costs but before service and performance fees.)

The Strategy made a loss of 13 percent during Q4 spread across a range of pairs, including losses on GBP/CHF, following previous gains in GBP/USD. 

Outlook

The questions facing the markets going into 2020 must start with the evolution of the US Fed‘s balance sheet and the strategy regarding its management. As it stands, they remain beholden to the market’s needs by rolling (oversubscribed) term repos and have discussed substituting bills with short-dated coupon instruments, alongside further debate surrounding a POMO such as a Standing Repo Facility.  With plenty of issuance in the 2020 pipeline, it has the look of involuntary debt monetisation, most appealing for the likes of gold and with longer-run implications for the stability of the USD. 

Data will be watched to see how much impact a Phase One trade deal signing might have on economic activity, with a close eye also on how high the CNH might readjust. Geopolitical events in the Middle East are lifting volatility in oil, gold and bonds, though, as before, the moves in equities and FX are far more muted. 

Trade negotiations surrounding the Brexit future deal and the scale of any fiscal easing will shape developments in GBP and, to a lesser extent, the Euro, where politics might perhaps have more impact than the ECB during the quarter. Towards the end of the quarter, we also have the prospect of determining who might be in the running for the Democrats in the November US election.