Head of FX Strategy
Summary: The clearing of the immediate uncertainty around the US-China trade deal question has failed to see volatility ramping significantly, though some of that may be down to the time of the year and the desire to wait for a clean slate in the New Year. The reaction to the UK election, however, suggests some more profound level of uncertainty.
We’ve seen the clearing away of one of the key issues that was supposedly holding back traders from committing risk capital, as the US and China have finally come to terms on a trade deal, even one that will take time to monitor for the quality of the actual implementation. Another uncertainty that has been cleared, if somewhat less completely, is the UK election, where the strong majority government clears the path for a smooth Brexit, though uncertainties linger on the damage already done to the UK economy and the shape of a trade deal to come is as yet unknown. Below are five charts we will be watching closely in the sessions to come at this very interesting time of the year – at times in the past, poor liquidity has aggravated trading conditions into year end (though the Fed has gone a long way to roll out the red carpet for risk appetite by rolling out a massive new round of repos to keep USD liquidity issues at bay for the coming weeks) and January has often served as the launching pad for major new trends as investors put risk capital to work at the beginning of the calendar year.
AUDUSD – make up your mind already!
The kneejerk Aussie rally in reaction to the US-China trade deal was oddly reversed late on Friday, as some perhaps decided that the announcement itself is going to be as good as it gets or were spooked by the price action. Regardless, the Friday reversal in AUDUSD, for example, maintains the interest in that 0.6900+ area, with a solid close well above that level needed in the coming session or two to suggest that Friday’s bearish reversal was a red herring. Any fading of risk appetite and plunge back down through 0.6825-00, meanwhile, suggests that the long established bear trend risks reasserting (or at least tactically suggests further weakness within the lower range).
CADJPY – a momentum trade in waiting or another dead end?
The Canadian dollar got a boost late last week from the fresh surge in oil prices, on the indication that the US is headed to signing the USMCA trade deal that takes trade conflict with the USA off the table for the foreseeable future, adding to the positive spin from the US-China trade deal. And the Japanese yen is weak as global risk appetite has lurched into a veritable melt-up on the lifting of policy uncertainty from the US-China trade deal, UK election and Fed’s accommodation. If the positive vibes carry over into the New Year, we are likely to see this pair clearing the overhead resistance. Either way, this pair could show high beta to the backdrop, especially if we begin to see noticeably weaker US numbers – as CAD is heavily exposed to economic conditions south of the border and the yen is often one of the more sensitive currencies to US data.
GBPUSD – disappointment for sterling bulls
The sterling move in the wake of the UK election was halted near the 1.3500 level in GBPUSD and since then, the price action suggests that it may take some time for sterling to digest this move. If the price action stays clear of about 1.3200, we may maintain a bullish flag-type set up here, but if the backfilling punches down through that level, essentially more than reversing the entire post-election rally, the risk mounts that a more profound reversal and disappointment of the bears takes the price action back to 1.3000 or lower.
EURUSD – some momentum either way after the turn of the calendar?
The Euro rally never really got established, perhaps in part as there is no sense that the EU is ready to move forward with a strong fiscal program, and if it does it may be slow in coming and focused on areas (alternative energy) that may offer poor investment returns. In addition to the wait for a more clear fiscal impulse, we are most curious from here how the euro behaves if markets ever lurch into a strong risk-off move on the theory that the negative yielding euro has been a popular funding currency for carry trades. As well, getting beyond the risk of end-of-year USD liquidity issues is a key hurdle for bulls. Technically, the 1.1180-1.1200 hurdle is an important one for the pair to clear to get something moving to the upside, while the 1.1000 level remains the downside pivot level.
EURNOK – once again at the cusp of a breakthrough
The US-China trade deal has unleashed a solid rally in animal spirits and hopes that the clearing away of any further harm from trade disputes between the two superpowers will be a boon to global growth. That has been a boon to the NOK, as has the solid uptick in oil prices. The move lower in EURNOK is a bit more impressive here because of the now well recognized seasonality challenges for NOK into year-end, so if market conditions remain supportive as January gets underway, we could witness a significant further repricing of NOK to the upside if the 10.00 level can give way here – possibly down into 9.85.
2024: The wasted year
Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
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Markets are driven by election optimism, overshadowing growing debt and liquidity concerns. The 2024 elections loom large, but economic fundamentals and debt issues warrant cautious investment.
As US economic slowdown hints at a shift away from exceptionalism, USD faces downside with looming Fed cuts. AUD and NZD set to outperform as their rate cuts lag. JPY gains on carry unwind bets and BOJ pivot.
Amid AI and obesity drug excitement, equities see varied prospects: neutral on overvalued US stocks, negative on Japan due to JPY risks, positive on Europe. European defence stocks gain appeal.
With the economic slowdown, quality assets will gain favour, especially sovereign bonds up to 5 years. Central banks' potential rate cuts in Q2 suggest extending duration, despite policy and inflation concerns.
Commodities poised for rebound. The "Year of the Metal" boosts gold and silver, copper awaits rate cuts. Grains may recover, natural gas stabilises. Gold targets $2,300-$2,500/oz, copper's breakout could signal growth.
