We’re only at the start of the third trading week of the new year and already there are some definite themes that are affecting the market. Currency traders will pick up on these very quickly and they will continue to influence the major moves for the foreseeable future.
The first and major theme that is the most dominant in the market at the moment is the pending change of government in the United States. Now this would normally be a major focus for the financial markets but given the nature of the election and the main player involved the impact on the market is un-presidented. (Sorry! couldn’t help it!)
We’ve had talk of various initiatives for the new administration including tax reforms, stimulus, deregulation and protectionist policies which has quite rightly led to a strong move to the topside in the USD since the US election result in November. We’ve also got this move backed up by members of the FOMC giving strong indications to the market that we will have 3 rate hikes this year in the US. The currency market has jumped on the back of this wagon and has made a lot of hay while that sun’s been shining and is consequently still sitting happily long USDs.
However now we’ve seen a few rain clouds on the horizon which could lead to some significant dollar selling to correct the move we’ve seen in the last couple of months. Most notably for me is the fact that the STIR (Short Term Interest Rate) market isn’t buying into this euphoria (they’re always a bit of dour bunch anyway ) – and is only pricing in 2 hikes at the most. Also, the recent speech from ‘DTrump’ omitted to mention much of the good stuff that the market was hoping to hear and indicated an initial focus on an overhaul of Obamacare for the new administration. This led to some retracement in the currencies but any further indications that the new team will amend or delay their initiatives could lead to a much more significant correction in the market.
The other big theme so far has been the continued Brexit discussions between the UK and the EU, as we’ve seen in the last couple of weeks any ‘hard Brexit’ talk has hit the sterling significantly and any talk to a more accommodative or ‘softer Brexit’ will lead to strength coming back to the cable and sterling crosses. At present it seems that both sides are trying to play hard ball and this is leading to significant downside for GBP as we saw this morning when the market gapped on the Sydney open – and let’s not forget the ‘flash crash’ in October. But, as we’ve already learnt this year, the currencies can turn on a dime (10p piece in this case) and I now see the risk to the topside in sterling, especially as political posturing is replaced by cold hard economic common sense further down the track.
The important message to take from these themes is that these news events are driving the market harder than traditional data releases. For instance the figures out of the UK have actually been very positive since the start of the year, Manufacturing Production last week was 1.3% against expected 0.6% and the previous week all the PMI data was stronger than expected, however Sterling has depreciated across the board.
These kind of market conditions can make the job of the FX Trader much harder as they have to have their eyes on the news wires constantly to be able to take advantage of the next piece of news, especially when it’s not scheduled. I can see these themes continuing to dominate the market for the first quarter of the year and certainly with the new president coming into play on Friday I think we’ll see more volatility and not less.