We left another week behind us.
What were the decisive developments in the past week?
- FOMC Statement and the FED’s U-Turn.
- Disappointing macroeconomic figures and political turmoil in Eurozone.
- Global growth concerns
- Trade talks
- Brexit Uncertainties
I have mentioned in my previous articles several times. The Dollar is still the strongest currency. The Yen may continue to find demand as a safe haven asset.
We tried to trade in this prospect last week. We stayed short on EURUSD, GBPUSD, EURJPY, GBPJPY, NZDUSD and one nice long trade on AUDNZD.
Following the disappointing Germany Factory orders data, we sold DAX and made quite nice profits.
The pound wants to shine. However, Brexit uncertainty is setting borders BoE’s playground.
Historical correlations appear to be broken. DXY is rising but Gold is not falling. Soon indices are likely to start to fall. Signs of global recession and crisis.
I will publish forecasts separately, but, the fundamentals are clearly skewed against the euro and with the US dollar rising and stocks falling on risk aversion, the pair should be trading below 1.13. It hasn’t done so yet but I think it’s only a matter of time before new-year-to-date lows are seen. Fourth quarter GDP numbers are due for release next week and given the central bank’s concerns and the contraction in German retail sales, the risk is to the downside for the report.
Meanwhile, the Canadian labor market is on fire. Markets were only looking for an addition of 5K jobs but instead, more than 65K jobs were created in January, which puts the 5-month average just under 50K jobs per month. Private-sector hiring was exceptionally strong, which will soften the blow of weaker global growth. This report also reinforces the BoC’s view that the economy is on solid footing but as Governor Poloz said, there’s nowhere to hide from Brexit or trade fights so there’s no reason to raise rates.
The US and China have until the beginning of next month to reach a trade agreement but based on President Trump’s comment that he will not be meeting with President Xi before the deadline, the talks are not going well. Global growth is also a problem with central banks around the world echoing the same concerns about downside risks so in light all of this, it’s hard for investors not to be concerned. the market may not find what it expects. The promises of the US and China could not create a positive impression so far.
Prime Minister May needs to deliver significant progress on Brexit negotiations to Parliament on February 13 or the government will present a motion that would allow MPs a greater control of the Brexit process.
In midterm, Gold is likely to shine as a Safe Haven. This is the favorite weather of the Gold investors. Given that this recent correction is a reflection of gold prices surging $1300, a very respectable rally, the price recovery over the last couple of trading days is clearly an indication of the resilience of current gold pricing and demand for the Gold.
Crude oil prices fell slightly as traders continued with caution amid persistent worries about global economic growth and the chances of the United States and China agreeing on a trade deal. The expected economic slowdown in China is adding its own weight to crude oil prices given that the Asian economy is the second-largest oil consumer in the world. Rising DXY is adding weight on the oil prices as well. However, OPEC is very confident about the cuts. I do not think that they would let the prices trading below $ 50.
Next week the focus will remain on trade talks, Brexit, corporate earnings and if we will see another government shutdown. If US negotiators do not deliver a more optimistic tone on the trade front early in the week, we could see risk aversion accelerate. The Republicans and Democrats do not want to see another shutdown and talks appear to have been constructive this week. Even if both parties agree on a deal, uncertainty lies with the President, since it is unknown if he would accept funding of just north of $2 billion for his border wall funding, well shy of his heavily demanded $5.7 billion.
The US economy will also be in focus next week with CPI, retail sales, the Empire State manufacturing index scheduled for release. If these reports surprise to the downside, stocks will sell-off further and USD/JPY could drop below 109. If they surprise to the upside and show stabilization, which is feasible given the recovery in oil prices last month and end-of-year holiday shopping, it will give investors even more reasons to buy US dollars.
The relief rally in equities appears to have run out of steam as risk aversion gained momentum on concerns trade talks are not progressing fast enough and global growth fails to show signs of stabilization, despite accommodative stances globally.
The US dollar and Japanese yen could continue to see gains if the political risks yield no progress and the economic backdrop continues to diminish.
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