Head of FX Strategy
Summary: A sudden new source of geopolitical risk is increasing volatility, but the risk from a headline driven market is that volatility can prove a two-way affair, rarely the best of conditions for the momentum trader. We will also have to see how trading resumes next week as 2020 really gets under way and we work free of end-of-year effects and the initial kneejerk reaction to geopolitical developments.
Today’s Breakout monitor
The FX Breakout Monitor is a concise PDF overview of all current and recent price breakouts for the short and medium term for major FX pairs and spot silver and gold.
Below is a snapshot of the full list of currency pairs we track for the breakout monitor. We have seen a huge direction change to begin the year in USD and JPY pairs – especially overnight in the wake of the US attack on Iran’s military leader in Iraq – while other developments, like the strength in most oil-linked currencies and precious metals, has extended on the same developments.
The recent USD and JPY weakness has reversed sharply, spoiling momentum trades in a number of crosses as 2020 gets underway. The source of the sudden change in direction – geopolitical concern on US assassination of an Iranian military leader in Iraq – strongly enhances the risk of a headline-driven market, often anathema for risk control and momentum trades, so traders will need to tread carefully here. Elsewhere, we are seeing the surge in oil prices on geopolitical drivers extending already notable strength in oil-linked currencies like NOK and CAD (although note that USDRUB is torn between the implications for oil prices and risk appetite from these developments). And non-oil linked, generally pro-cyclical currencies like SEK, AUD and NZD have all been suffering quite a beating after recent run-ups on hopes for a resurgent economy in 2020 and strong risk appetite from the Fed’s latest easing over year-end.
Today’s Breakout Highlight: EURUSD
This latest setback for EURUSD bulls is a familiar sight as the past eighteen months and more of the technical action has been marred by the inability of the pair to sustain a directional breakout for any length of time. It’s difficult to know at present whether this latest sell-off is merely a one-off kneejerk move or can quickly reverse, but we’ll keep our minds open – particularly given both the timing here over the transition to a new calendar year and that the market can quickly change its mind about the implications of headlines. Technically, though, the bulls need a quickly bounce back and close back above 1.1200 to be in business again for a fresh look higher. Note the key 200-day moving average in play as well.
Bond. Long Bond(s)
With real rates being too positive, we see three scenarios: Opportunity to lock in rates at cycle high, government overreach to keep the economy afloat or a complete reset of the economy.
Steen Jakobsen,
Chief Investment Officer
Is a bond bull market ahead? Inflation still poses a risk for investors, but the moment for increasing duration to your portfolio may be approaching towards the end of the year, when central banks might be forced to cut interest rates.
Althea Spinozzi,
Senior Fixed Income Strategist
The furious rate hike cycle has brought gains in the US dollar, but with stagflation risks in Europe and the UK and weakness in the Chinese economy, USD may have more room to run. But a strong dollar could also have repercussions for US growth, emerging markets and commodity prices.
Charu Chanana,
Market Strategist
With the cost of capital rising painfully, stagflation fears are back, illuminating the fragile state of the green transformation, while giving a tailwind to nuclear power, and threatening the growth of AI-related stocks.
Peter Garnry,
Head of Equity Strategy
With supply tightness not only in energy but all commodities, the momentum in commodity prices may continue, pressuring central banks to lower real rates. That could be a good setup for precious metals, including gold, silver and potentially platinum as well.
Ole S. Hansen,
Head of Commodity Strategy
As the pandemic showed, even the US Treasury can experience seismic shifts. With the government increasing the pace of issuing bonds to support fiscal spending, the complex Treasury market and regulatory constraints could spark a liquidity event.
Redmond Wong,
Market Strategist
The tide has turned for bonds. Given the current yields, bonds have become an attractive investment, with added benefits including lower risk than stocks, increased diversification and a steady stream of income unaffected by economic changes.
Peter Siks,
Investment Coach
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