Head of FX Strategy
Summary: The frantic gyrations in global equities have fed far less volatility in currencies than in previous cycles, partly due to conflicting themes for the US dollar. Only the yen has played a muted version of its former safe haven role over the last week of trading.
Currency traders are unsure what to make of the backdrop of what is so far shaping up as the worst December in modern market history. Most currencies have traded in relatively sideways fashion or only traded with a weak beta to the risk on/risk off gyrations of the last ten trading days, including yesterday’s emphatic bounce.
The two most volatile currencies in G10 have been the trusty yen, which has more consistently, if still in rather muted fashion, played its safe haven role more consistently over the last week, and the Norwegian krone, which has been left twisting in the wind by Norges Bank’s cessation of purchases and the crash in oil prices. Yesterday’s enormous rally in equity markets and oil finally brought relief to the beleaguered krone after it crosses above the pivotal 10.00 level and we may have seen the top for now if this rally in risk and energy marks at least a temporary low as Norges Bank purchases will resume in January.
Market observers' attempts to gin up a narrative for what has unfolded this month are generally insufficient. The terrible month of December was likely not just about Trump’s chaotic administration and criticism of the Fed or the tight Fed itself or algos but more likely a combination of all of the above, in addition to the crash in oil prices and drying up of liquidity.
Likewise, yesterday’s steep rally in risk appetite was attributed in part to Trump’s reassurance that Mnuchin’s and Powell’s jobs are safe, when in fact the likely key driver was end-of-month and end-of-quarter portfolio rebalancing after an enormous drop. I am certainly not alone in being personally responsible for these types of flows with my pension allocations at fixed percentages in stocks and bonds. Alas, whether this bounce extends into the end of this week and the end of the year on Monday (suspect most serious flows will dry up ahead of the weekend), we won’t know the lay of the land until the New Year gets fully under way in the coming weeks and risk takers have fresh mandates to put their capital to work, whether with bullish or bearish designs.