The volatility in Forex remains quite compressed, with the positive soundbites in the US-China trade talks, not really providing the stimulus necessary to see a stronger commitment of capital into the currency market. It appears as though equities are still the main destination to express an opinion, which continues to be, the market sees a glass ¾ to almost full as an analogy of the chances that the US and China will ultimately sign the phase one deal, which is most likely going to include a generous roll back of the existing tariffs. So, while vol remain low in the USD, EUR, CHF amid the lack of fresh fundamentals to re-examine valuations, there are a few currencies that continue to show interesting price action. These currencies are, unsurprisingly, the ones where Central Bank have recently made some noise. Firstly, on the back of the RBNZ shocker earlier this month (kept rates steady), a healthy dose of vol remains in the NZD as traders exploit the bullish sentiment as the short-side exposure keeps unwinding. The CAD keeps regaining ground with solid vol intraday after last week’s BOC Poloz threw cold water into the prospects of a rate cut in December. Another currency that saw a brief spell of vol intraday in the last 24h was the Aussie as the RBA Boss Lowe updated the market on the chances of QE. The net effect, I must say, was quite neutral as the market realizes that we are still a long shot away from any QE-related scenario to become a hot topic yet. Meanwhile, the GBP slid from its weekly high on a setback in UK polls for the interest of the Conservatives. it’s been all about sentiment trading in the GBP . Lastly, the JPY remains on the back-foot as equities keeps soaring.
The rare dynamics of trading the forex market based on hard data as market reacted positively to upbeat US core durable goods and US growth figures, while the US-China trade headlines were put on the back-burner, ended the moment news broke out that US President Trump signed the HK bill. Remember, this bill supports protesters in HK and the immediate reaction of the market has been to price the risk of retaliation by China as it’s plausible to expect that this act of formalizing the HK bill may potentially derail some of the progress made in trade between the US and China, which the stock market has priced to perfection. The Yen, Swissy and Gold were bought off the lows, even if the net effect when accounting for Wednesday’s groovy vibes is still negative. The Pound remains trading at the tune of its own drums, emboldened by the latest YouGov survey, which predicts a big majority for Tories in the upcoming UK general election. The Australian Dollar and New Zealand Dollar, as the market discerns the implications of Trump signing the HK bill, were taken to the woodshed, which clearly portrays the risk of China retaliating in some way. Lastly, the USD and CAD, are both unfazed so far by the worsening of the risk profile in the market. Remember, it’s going to be a long weekend in the US markets in celebration of Thanksgiving and Black Friday.
The EUR index shows the potential to be targeting higher pools of liquidity after the abrupt reversal on Friday, while the USD index is at risk of an extension back down as the price poked unsuccessfully into an area rich in liquidity at an index level. Find out the most relevant thematic in Forex and the outlook in G8 FX by reading today’s report.
There has been a shift in G8 FX flows as Trump triggered a major sell-off in both stocks and bond yields, with the impact of these fluctuations this time reverberating into the currency market, as the Yen and Swissy were bought up as the market flocks back into the protective and safe-haven nature of these assets at times of uncertainty. The remarks by Trump, stating that “it might be better for the trade deal with China to be done after the US election”, which is a year away, if true, should radically change what the market had been pricing up to this point, which was some type of positive resolution around the turn of the year. Are we moving from a glass half full-type of approach to now experience a paradigm shift by which the market starts to rollback the built optimism? The risks are certainly on the rise. As the chart below illustrates, despite the return of the risk-off profile, the NZ Dollar keeps its status as the top performer this week, followed by the Swissy, while the Aussie comes third, benefited by China PMIs and a less dovish RBA, even if the reconciliation with the negative headlines on China trade have taken the shine away from the currency. The Euro and the Sterling have shown a decent performance so far, in line with the synopsis shared with the readership that both currencies look set to experience upward pressure in early December. At the bottom, we can find the North American currencies, both moving into softer territory in tandem, even if it will be the Canadian Dollar the one to stimulate a contrast in flows today as the BOC is due to releases its latest monetary policy decision, with unanimity, according to a survey by Bloomberg, that the Bank will keep its powder dry.
Funding currencies, most notoriously the Swissy and Yen, fell out of bed, accompanied by overall weakness in the US Dollar and Euro. The risk landscape experienced, once again, a 180 degree turnaround after a Bloomberg report hinted at the Phase One trade deal between the US and China moving closer. The renewed optimism around a positive resolution in the current impasse to ink a deal turbo-charged the Kiwi and the Aussie too. The New Zealand Dollar keeps outperforming its neighboring peer driven by a more sanguine domestic landscape, reinforced by the RBNZ announcing plans to force banks to raise capital ratios, while the Aussie lags behind as mounting evidence (Aus GDP, retail sales, trade balance) shows the economy is still limping unable to get out of second gear, which will definitely keep the RBA on the watch to adjust policy if needed. The Sterling finally saw the smart money sponsorship campaign by targeting much higher levels, it left and never looked back. Lastly, the CAD was marked up aggressively after the Bank of Canada kept rates unchanged at 1.75% while sounding less dovish than previously thought.
Have we seen a meaningful bottom in the US Dollar? As the chart below reflects, the currency was by far the biggest loser during the course of last week even if the US NFP blew it out of the park by showing a huge positive divergence against the expected print. This contrast in technicals vs fundamentals could easily lead to think holding a USD bullish stance this week offers value, and I wouldn’t disagree, but as it’s usually the case in trading, one must be mindful to pick the right combination of currencies and at what particular level to bank on this premise. I offer a tease of my view in today’s chart section to get an idea of the outlook I hold in USD-related pairs. Remember, in terms of currency seasonals, the USD tends to suffer from aggressive bearish tendencies in December, which judging by the performance so far, is proving to be a decent predictor of the overall interest in the Greenback. Besides, this week’s ebbs and flows will see a handful of currencies the likes of the GBP (UK general election), EUR (ECB meeting), AUD & NZD (Chinese tariffs deadline) face idiosyncratic-type gyrations. The USD will also be injected extra volatility as it responds to the outcome of the FOMC on Wed. Therefore, it’s a week charged with plenty of fundamental events, which is why, as a trader, you want to be timely and manage your positions adequately as the success or lack thereof in your plays this week will heavily hinge on your ability to execute a plan that accounts for these risks coming up.
The currency market is in a holding pattern ahead of the abounding barrage of risk events late this week, which will start with the FOMC on Wednesday, the ECB policy meeting and UK general election on Thursday, ahead of the decision on Chinese tariffs by Sunday Dec 15. The ebbs and flows into trading currency has, therefore, understanbly receded significantly. If one is to play positions this week, be quite strategic as this tranquility is leading up to an injection in vol. As I’ve detailed in the last report, the Central Bank events are likely to act as an idiosyncratic factor mainly influencing flows into individual currencies, even the UK general election may see volatility largely contained within the walls of GBP-related pairs. It’s going to be the decision by Trump to either enact or suspend tariffs on China, with the deadline this coming Sunday, that may see the most impact in financial markets as a whole, as this has been, without a doubt, the overarching theme that the market has been most sensible to, and crunch time is looming fast. As the chart below shows, the movements in FX have been rather tepid, with the GBP and NZD still maintain its advantage when accounting for last week’s performance, while the USD, CAD and EUR, in this order, remain the least favored this Dec. Sandwiched in between we find the JPY, CHF and AUD, as we await more conclusive price action.
The European currencies were the main winners on Tuesday, with the Swissy leading the pack from the early hours of trading in Asia, only to be followed by a perky Euro as the German data continues to show some very early signs of green shoots in the country. The Sterling remained well supported throughout the day until a moment of reckoning by an overly long market led to a unwinding of positions as the market learned that the benchmark UK Gov MRP model survey came worse than expected for the Conservatives. Their lead is narrowing dangerously, bringing back fears of a hung parliament, even if that is still far from being the base case scenario being priced in by the market. The US Dollar, meanwhile, remains very subdued ahead of today’s FOMC where the market expects very few changes to the statement as the Fed has shifted to a neutral and data dependent stance. It’s worth noting that the USD, as reiterated this week, tends to perform poorly in Dec judging by the collection of historical data in the last 3 decades of price action at this time of the year. The Canadian Dollar was better bid, partly in line with improved technicals, but also getting an extra breather in the way of a new NAFTA deal finally approved by officials. Lastly, the oceanic currencies suffered sell-side pressures since the start of the European session as the market is none the wiser as to whether or not Chinese tariffs will be enacted by Dec 15.
While it may come as a surprise for some that the USD keeps selling off on the back of a strong US NFP last Friday, coupled with a neutral FOMC, if one accounts for the technicals bearish outlook and forex seasonals, it makes the follow through in sell-side activity slightly less of a surprise. The explosive rise in the Oceanic currencies plays into the view that the market might start to be front-running Trump’s decision to potentially delay the Dec 15 Chinese tariffs. The Sterling, as the market awaits the outcome of the UK election, has shown steadiness in spite of the setback in the last UK Gov MRP poll in which Conservatives saw the lead cut significantly at the expense of Labour. Amid the improvement in risk appetite dynamics as reflected by the up move in equities (not reflected in global yields), the Swissy and Yen found consistent selling pressure. Lastly, as I elaborate in today’s charts section, the Canadian Dollar managed to weather the USD bearish storm with success, cementing the view that a bottom may have been found.
The Sterling has been catapulted, with the bulk of the move occurring in the blink of an eye, in response to the UK election exit poll showing that the Conservative party is set to win with a big majority of 368 seats as the votes continue to be counted. The Oceanic currencies also benefited from buy-side flows as the US and China have reached a deal in principle, which now awaits Trump’s signature. The conditions of the Phase One deal, where a roll back of 50% from existing tariffs alongside the suspension of Dec 15th, was definitely music to the ears of a market that remains in a groovy mood to bid risk to the boots. Amid this risk dynamics, the Yen and the Swissy have fallen out of bed, while the US Dollar also makes fresh trend lows as the weak seasonal trend continues to play out in a textbook manner this month. The Canadian Dollar followed the US Dollar in lockstep by showing fragility as well, even if the index is yet to make fresh trend lows. The Euro managed to weather the ECB mini-storm with marked success as the Central Bank upped the CPI forecast a tad and sounded slightly more optimistic on the EZ growth slowdown bottoming out.
The main takeaway of last week’s eventful trading activity, as we head into the final adjustment of portfolios before the year-end, is the settling of a new reality. Granted, in spite of all the wax and wane, we are weeks away from welcoming a new decade with the two most important macro risks of 2019 (Brexit, US-China trade war) to be stared through the rear mirror. It doesn’t mean this 2019 staple for news-watchers can be abandoned, far from it, as the market will remain sensitive to follow up headlines as Brexit and trade headlines will swiftly transition, both in tandem, into phase two. However, it certainly provides breathing room to divert the focus more decisively into central bank monetary policy divergences, liquidity actions, and in what looks likely to be an environment that unless major shockers, is setting the stage to be dominated by lower vol conditions. If this view holds true, and as the overall flows in the G8 FX indices indicate, we may see the perky Pound, the revitalized Aussie and the flying Kiwi continue to be firmly anchored based on the improved ‘risk on’ sentiment. I’d personally add the Canadian Dollar into this basket as another potential currency to take into account for a shift in order flow to a more positive bias. Should the groovy vibes in risk dynamics extend into 2020, watch for the Yen, Swissy and the US Dollar to be the candidates to suffer a continuation of the steadiest sell-side flows. When it comes to the Euro, it won’t be an easy ride, but if more evidence gathers that Germany growth slowdown is bottoming out, I wouldn’t be surprised if the Euro keeps showing a relatively benign outlook, all within a context of restrains in performance that comes with a negative rates’ currency.
The Euro, the US Dollar and the Canadian Dollar found the most demand to start the week. While the move in the Euro defies the fundamental logic as European PMIs disappointed quite badly, it plays into the view that the overall flows to accumulate long inventory in the single currency remain present, fueled by the uptrend in the EUR/USD. The range-bound conditions in the Euro index also indicate the Euro is in a rather stable position. The rise in the US Dollar on Monday occurred in a clear context of a bearish trend, a dynamic that has been dominating proceedings since the start of December, while the timid appreciation in the Canadian Dollar supports my case for a potential bottom at an index level. With US equities making fresh record highs (S&P 500 up 33% YTD), the Yen remains the currency most punished as the index extended the downside. The Sterling, after the outsized UK election-induced spike, is accelerating the current downside pullback. The outlook in the Aussie and Kiwi remains firmly anchored by the latest developments in the US-China trade domain as both countries announce preparations for a signature ceremony to seal Phase One deal. Lastly, the Swissy remains a stubborn one, unfazed by ‘risk on’ flows to instead be more influenced by the benefits of a removal risks in Brexit after the landslide victory by the Conservative party.
The waxing and waning in the valuation of the Sterling, with an average daily range of well over 1% since the UK election outcome, portrays how unpredictable and treacherous the environment to trade the Pound remains now that the market is looking past the election and re-calibrates the drivers based on what lies ahead. The latest selling round, courtesy of Bojo planning to set a hard deadline for Brexit to Dec 30, 2020, has resulted in the evaporation of all UK exit poll-led gains in the Pound, and represents a harsh reminder that it is far from certain that a smooth transition out of the Eurozone will ensue. The bottom line is that a wild ride trading the GBP awaits in 2020. On the flip side, the Euro and the Swiss Franc, have benefited the most from the lackluster performance in the Sterling, as portfolios appear to have reshuffled swiftly away from an overexposure in the Sterling and diversify into the other European-based currencies. The Canadian Dollar, in line with the bullish projections established since last week in the technical analysis section of this report, continues to attract increasing demand flows as the bearish cycle in the index decays. The dovish stance retained by the RBA minutes didn’t help the Australian Dollar, which continues to pullback even if the outlook is fairly constructive judging by the recent break of structure in the index. The Kiwi, meanwhile, had a similar weak performance akin to the fragility seen in the Aussie, even if the currency also maintains a bullish outlook going forward. Last but not least, two of the currencies most punished in December, that is, the USD and JPY, managed to recoup some of its ample losses despite the respective indices still display clear bear trends.
The Australian Dollar has attracted the most buy-side interest as we head into the European session after a huge beat in expectations in the Australian employment figures. The latest run up in the Aussie has now allowed the currency to overcome the British Pound in net gains this December, as the latter continues to suffer from the renewed uncertainty of a hard Brexit should UK PM Johnson keep the hard-line stance of exiting the EU (deal or not) by the end of Dec 2020. The currency that keeps showing the most consistent buy-side flows is the Kiwi as evidence mounts that the New Zealand economy has turned an important corner in its growth outlook, as reflected by the upbeat NZ Q3 GDP figures released just hours ago. This improvement in fundamentals has the market anticipating a prolonged neutral stance by the RBNZ. The Canadian Dollar is hands down the currency showing the best performance this week, and as readers of the Daily Edge can attest, this is a long play I’ve hinted based on cycle dynamics at an index level. The Swissy is surprisingly strong as we head into the last week of real trading before books are closed for the year, but with negative swaps and a ‘risk on’ appetite dominating, I personally can’t see the CHF sustaining these relatively lofty levels for too long before sellers step in. The Euro, meanwhile, is unable to get out of 2nd gear, and the bias is far from certain despite the pattern of buying weakness has worked well this December. The German IFO, which came upbeat, should continue to support this buy on discount dynamics. Last but not least, the USD and JPY remain by far the most fragile currencies this month, and if one looks at the indices, both currencies are trading in lockstep in December. Remember, Dec tends to be the worst performing month for the Greenback due to tax incentives, while the Yen has fallen out of bed as the macro risks events (trade, brexit) have relaxed.
The entrance of a new decade has brightened up the outlook for the Japanese Yen as geopolitical tensions between the US and Iran have resulted in a swift transition into risk-off dynamics dominating the proceedings in the forex market. On the other end of the spectrum, we find the Oceanic currencies and the Sterling as the worst performing amid the deleveraging off carry trades and tightening of financial conditions as both equities and bond yields fell in tandem globally last Friday. The US Dollar has been greeted with positive flows to start the year and so far has been able to capitalize on these risk averse conditions, with the extra backing of January’s seasonal pattern (best month of the year by far) also starting to pan out in favor of the world’s reserve currency. The Canadian Dollar, assisted by benign fundamentals and technicals at an index level, alongside its correlation with USD positive flows, is also taking advantage of the wave of buying pressure in the USD, even if it still exists a major contrast in the technical outlook between the two of them, in favor of the CAD. The EUR and CHF are virtually unchanged from the levels quoted to start the year, as the chart below shows, even if readers should be made aware that this is typically a very rough month for both currencies from a seasonal perspective, which in the case of the EUR, is backed up by the bearish market structure.
The thematic in the forex arena has swiftly transitioned from the US-Iranian crisis, which had led to an injection of risk off flows, to a more benign landscape, dominated by a sense that the global stabilization thesis into 2020 is still panning out. The European block (EUR, GBP, CHF) led the charge higher after ‘across the board’ improvements in EZ/UK services PMIs, with further backing by the notable jump in German retail sales and the EZ sentix investor confidence. The recovery in risk appetite trumped the upward trajectory of the Yen, by far the worst performing currency as the week gets underway. The Aussie is not showing signs of life so far after the China services PMIs from Caixin / Markit came at a disappointing, but most importantly, the market pricing for a February rate cut by the RBA has gone up marginally as the ramifications of the bush fires for the overall economic activity in the country play out. The Kiwi was largely unchanged for the day, with no drivers to take note of. The USD traded on the weak side despite still being one of the best performers this year, while the CAD built up on recent gains against the weakest currencies out there such as the Yen, Aussie or Kiwi.
One of the immediate effects whenever the dark clouds of war prospects hover around is the increase if volatility. Sadly, that’s precisely what we saw in the opening of the Asian session after news broke out that at least 30 missiles had landed at Iraq’s Ain Al-Asad airbase among other locations, targeting US forces. The retaliation by Iran to the death of its highest military profile leader has now taken long, and the open question now remains, to what extend will the US strike back? Will a war be declared? The buying of the Japanese Yen and the Swiss Franc currencies was fast and furious, as it was the sell-off that hit the Oceanic currencies (AUD, NZD). The rest of G8 FX (EUR, GBP, CAD, USD) were not greatly affected by the ebbs and flows as a result of the jump in risk aversion. Instruments were the panic mode was immediately noticeable included equities, where the S&P 500 futures wiped out all the gains since mid Dec, the price of Oil, which received a punchy spell of demand, alongside the further defiance of gravity by a flying gold. The fluid situation heralds the clear risk of unraveling into a full-on war, with the ramifications being heightened volatility in Gold, Oil, the Yen, Swiss Franc, Bond yields and equities. Should the US refrain from engaging in further retaliation, a major relief rally could be in store. Much will depend of whether the attacks have claimed US casualties.
Most of the volatility on Wednesday was concentrated along the Asian hours. Initial panic selling triggered by the prospects the US declaring war to Iran were relatively quickly met with the realization that such idea was unjustified judging by the delay for Trump to make any formal statement. What set out to be a very cloudy outlook for risk-sensitive assets shifted into an epic short-squeeze that lasted until the final hours of New York. If, as a trader, you are yet to do the hard yards in financial markets, the last 24h provides a great opportunity to understand in all its splendor the dynamic and efficient nature of the markets. One hour it may look like all hell breaks loose, while in the next, the psyche can change in a dime. After the headlines broke out of an attack to US personnel in Iraq by Iran, it became a binary outcome to figure out. Without much fact-checking available, the immediate premise was that Trump would need to strike back (war?), leading to a sudden fall in equities, bond yields, buying of Yens, Swissies, Gold. However, as Trump delayed its appearance with an official response until the next day, it acted as a revealing clue that an escalation of the conflict was probably not on the table. As Europe and American markets came online, the U-turn day kept playing out, only to get a final boost as Trump downplayed the attack with market friendly headlines.
The bout of risk appetite that originated soon after the Iranian missile attacks to US-controlled air bases in Iraq stood the course through Thursday’s trading as the air clears with seemingly no intention from either side to engage in further retaliatory conflicts. The ebbs and flows remain supportive of the US Dollar, and as the regular readers of the Daily Edge are aware, I have reiterated for weeks the risk of a turnaround in fortunes for the world’s reserve currency, mainly predicated on the combination of the outperformance it has in January alongside the cheap valuation it traded at the turn of the decade. The market has also retained a sell-side bias in the Japanese Yen as the preferred instrument to deleverage from. The Kiwi, amid no apparent distinct catalyst, and the Pound, pressured by dovish remarks by BoE’s boss Carney, fell at an even more rapid pace though. In the case of the Pound, the macro outlook, with the EU expressing left and right a comprehensive trade deal this year is ‘effectively impossible’, looks quite grim, which is also part of the reason the GBP is under pressure as the market has shifted the attention towards the phase of trade negotiations. Still al long way to go though. The Swiss Franc, meanwhile, continues to defy logic and for now is a train headed northbound steadily. The single currency (Euro) put up a decent performance too, even if lagging behind the strongest contenders for Thursday (USD, CHF), with no fundamental catalysts of note. Lasty, the Aussie and Canadian Dollar, on balance, were little change. The market are now awaiting the US NFP and Canadian jobs report as the next volatility booster in the currency market.
After an impressive start of 2020, the USD was unable to keep attracting buy-side flows, with the US NFP not justifying the extension of that momentum. The headline employment figures came a tad below expectations even if the real catalyst keeping bulls at bay came in the form of wage pressure, lowest print since July 2018. The Aussie, on the contrary, drew the steadiest buy-side interest since the very start of the Asian session last Friday in response to an outsized upbeat reading in Australian retail sales. This time, the Kiwi was able to play catch up and managed to successfully piggy-back the momentum of its neighboring peer. But even amid USD weakness, other currencies such as the Pound or the Canadian Dollar didn’t capitalize on it, especially the Pound, with the selling tendency from Friday extending at the open of Asia today as interbank dealings were dominated by supply imbalances in response to the dovish remarks by Bank of England MPC member Vlieghe. The Yen continues to retain a clear bearish bias even if by analyzing the index, one must be aware that the evolving flows show volume tapering, with weakness led by momentum accounts vs real money. The EUR, as it’s been the case for some time, keeps showing dull movements with low vol the norm. Note, this week’s economic calendar is lighter than usual, dominated by second tier events.