Head of FX Strategy, Saxo Bank Group
Summary: The FOMC and ECB are set to meet this week, with a number of EM central bank decision on tap. While the FOMC meeting could prove interesting, the UK election will inevitably prove pivotal for sterling and the question of the US-China trade negotiations ahead of the scheduled December 15 US tariffs on Chinese imports is easily the most pressing.
Markets are in a buoyant mood coming into this week on the narrative that the global economy is stabilizing and that the central banks have opened the taps for maximum liquidity – particularly in the Fed’s case to avoid any liquidity mishaps into year end. Since the first of September, the Fed has expanded its balance sheet by some $300 billion. The messaging from the Fed around how it views the ongoing expansion of its balance sheet could prove the most pivotal takeaway from the FOMC meeting on Wednesday, as the prior meeting made clear that the Fed wants to pause on cutting rates for now. The blowout November US jobs report on Friday makes it easier for the Fed to justify the pause.
But the most pressing issue looming over this market is the fate of the US-China trade negotiations, the never-ending story that now finally requires a concrete decision – even if just a punt/delay – because of the approaching December 15 implementation date of the last round of US tariffs. China, meanwhile, sent an interesting message over the weekend in ordering its public sector to eliminate all foreign suppliers of computer equipment, an obvious move against US tech giants.
Ahead of the UK election, the consensus strongly points to Boris Johnson’s Tories sustaining a sufficiently large lead to realize a majority Tory government. The Guardian measure of polls shows the Tories with a 10% lead on Labour, though as my colleague Ole pointed out on this morning’s Market Call, tactical voting is a risk, not to mention that the unusually large LibDem popularity (as a Remain vote) is a complicating factor. Sterling is strongly bid again this morning, but would be surprised to see a significant extension ahead of Thursday. In the options market, the skew is strongly negative, i.e., the market knows that the side with the most volatility risk over the election is to the downside on an election shocker (hung parliament leading to more delay, etc.).
The US and Canadian jobs reports on Friday provided a massive contrast that caught USDCAD shorts (on the back of a less dovish Bank of Canada meeting on Wednesday) the wrong way around. Canada’s unemployment rate leapt an eye-watering 0.4% to 5.9% in just one month. Even if the data series is choppy, this is a weak development that bears further watching.
Chart: EURUSD
After recently posting record low implied volatility for every major option time horizon, EURUSD is potentially pivotal over the US-China trade negotiations outcome potentially far more than over the FOMC and ECB meeting this week. Ugly outcomes that see the December 15 round of tariffs going into effect are potential EUR negative as the EU is the most dependent bloc on exports, especially to China. Technically, a failure below the recently pivotal 1.1000 is the first sign of a fresh breakdown, while bulls at this point really need that strong surge above 1.1180 to suggest the pair is finally on the move to the upside.
The G-10 rundown
USD - the USD has drifted back and forth without conviction and the background factor suggesting that it is actually remarkably strong is that the Fed’s liquidity provision and three rate cuts have not yet engineered a major retreat.
EUR – as indecisive as ever here, but the single currency generally at risk on further negative news on the global economy and from negative outcomes for US-China trade talks. EURJPY looking interesting for downside potential, given JPY comments below.
JPY – historically highly responsive to US data, the heaviness in JPY crosses is notable and could deepen significantly on concern that the US-China relationship headed for further deterioration.
GBP – surprising to see the market continuing to bid up sterling when little has shifted in expectations terms. The higher it goes, the less potential for further upside if the consensus scenario of a Tory majority obtains.
CHF – residual bids in CHF on concerns that US-China trade relationship not headed in the right direction? Certainly, the EURCHF chart very inconclusive between 1.0850 and 1.1050.
AUD – the Aussie should be reactive to US-China trade talk news of sufficient clarity, but also watching a couple of interesting data points on the calendar Down Under, including tonight’s NAB Business survey. A longer-term, overarching risk for Australia is climate policy as the country has a uniquely dirty footprint linked as well to China (coal and iron ore) in an ecologically fragile corner of the world.
CAD – a whipsaw week for USDCAD last week on the less dovish Bank of Canada and then the disaster of Canada’s jobs numbers for November. CAD most at risk on weaker oil prices and any US data misses, but also sensitive to the trade tension.
NZD – the kiwi is over-achieving here but not sure where the catalyst for a reality check arrives from (outside of US-China trade noise triggering a downdraft).
SEK – a lot of tension in the SEK outlook. Supportive at the moment is the Riksbank’s determination to hike rates to zero this month and the backdrop of strong risk appetite, but potential negatives are extremely poor data in Sweden and any risks to the global outlook from the US-China trade talks.
NOK – the technical situation looks promising tactically for EURNOK bears as oil prices have also bulled up a bit higher on the latest OPEC shenanigans, but any NOK upside could quickly get cut short if the US-China trade talks sour. Also, seasonal headwinds for NOK into year-end.
Today’s Economic Calendar Highlights (all times GMT)
The market is trying to get back to the pre-Covid and pre-war times, but that model is broken. A new dawn is here and the financial world needs to adapt.
Steen Jakobsen,
Chief Investment Officer
A political switch in China towards less tough control of its people and companies may kick things back into gear.
Redmond Wong,
Market Strategist
While the economic situation in Europe may not be as bad as feared, there's still a plethora of things to fix.
Chris Dembik,
Head of Macroeconomic Research
As the world turns increasingly bipolar, equity markets face harsh times as they transition into the new reality.
Peter Garnry,
Head of Equity Strategy
New alliances and collaborations outside of China may lead to prosperous times in Asia.
Charu Chanana,
Market Strategist
For years, it was thought that the balanced portfolio was a thing of the past. But recent developments may have changed that.
Peter Siks,
Investment Coach
Following a dramatic and volatile 2022 with good returns, a lot of this year's commodity performance may be driven by Chinese politics.
Ole S. Hansen,
Head of Commodity Strategy
2023 could be a tough year for currencies but EUR and JPY may have some upside.
John J. Hardy,
Head of FX Strategy
The commodity-heavy Australian market may have a good start to 2023, as the Chinese focus on growth signals demand for Aussie resources.
Jessica Amir,
Market Strategist
From a near-perfect environment for speculative assets before 2022 to the opposite, crypto faces fundamental challenges.
Mads Eberhardt,
Cryptocurrency Analyst
Disclaimer
The Saxo Bank Group entities each provide execution-only service and access to Analysis permitting a person to view and/or use content available on or via the website. This content is not intended to and does not change or expand on the execution-only service. Such access and use are at all times subject to (i) The Terms of Use; (ii) Full Disclaimer; (iii) The Risk Warning; (iv) the Rules of Engagement and (v) Notices applying to Saxo News & Research and/or its content in addition (where relevant) to the terms governing the use of hyperlinks on the website of a member of the Saxo Bank Group by which access to Saxo News & Research is gained. Such content is therefore provided as no more than information. In particular no advice is intended to be provided or to be relied on as provided nor endorsed by any Saxo Bank Group entity; nor is it to be construed as solicitation or an incentive provided to subscribe for or sell or purchase any financial instrument. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. As such no Saxo Bank Group entity will have or be liable for any losses that you may sustain as a result of any investment decision made in reliance on information which is available on Saxo News & Research or as a result of the use of the Saxo News & Research. Orders given and trades effected are deemed intended to be given or effected for the account of the customer with the Saxo Bank Group entity operating in the jurisdiction in which the customer resides and/or with whom the customer opened and maintains his/her trading account. Saxo News & Research does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication under relevant laws.
Please read our disclaimers:
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)
- Full disclaimer (https://www.home.saxo/en-gb/legal/disclaimer/saxo-disclaimer)
