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.
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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.
