Currency View by OFX

Last week’s news

• The Euphoria over U.K. Prime Minister Boris Johnsons landslide victory which sent GBP to the highest close since March vs USD on Monday, quickly unravelled itself after he announced plans to set a Brexit deadline for December 2020. Given the recent movement in risk reversals, there is potential for further downside. The barometer of market positioning shows that the premium investors are willing to pay to bet that the currency will depreciate further tripled after the immediate aftermath of the U.K. general election vote.
• Australian employment figures beat estimates (+15k) rising +39k in November. The jobless rate, a key measure closely watched by the RBA dropped to 5.2% from 5.3%. Although the drop in the unemployment rate was largely driven by part-time work, which is expected this time of year, the OIS market indicated a reduced risk of a February rate cut. The AUDUSD closed the week in positive territory at 0.69, just shy of its 200-Day Moving Average resistance around 0.6904.
• The U.S. dollar index rose over 0.5% last week, with the British Pound and Euro the main losers, dropping more than 2% and 0.40% respectively. The Kiwi and Canadian dollar and the Japanese Yen traded almost flat while the Aussie managed to gain more than 0,.30% against the US counterpart. US economic data is not showing signs of deterioration: industrial production figures for November printed 1.1%, above the expected 0.8% and above last month’s print (-0.8%). U.S. GDP for the third quarter came in at 2.1%, in line with previous and consensus numbers. Personal Consumption Expenditures have not shown any green shoots, but they are also in line with expectations and the previous level of 1.5%.
• The biggest news came from House Speaker Nancy Pelosi and the democratic majority House of Representatives, which voted to impeach President Donald Trump, accusing him of misuse of power and obstruction of Congress. A trial is currently set to take place in the Senate in the New Year; however, given the Republican Party majority there, it is highly unlikely that the president will be removed from office when senators cast their votes.
• European PMI data largely met market expectations and therefore the reaction on the Euro was initially muted. However, the EUR/USD pair fell around 0.4% due to a stronger Greenback and due to the weakness of the British pound by the end of last week. The EUR/GBP pair had a strong bounce of 0.8%, which was mostly due to announced plans to set a Brexit deadline for December 2020.

Looking ahead

• JPY volatility has hit fresh record lows as key risk events have been effectively priced out and Japan’s Yen remains trapped in a tight range between 108 and 110 per USD as the holiday season emerges. One-month implied volatility slipped to 4.1 on Thursday from previous highs of 10.35 in January, averaging 9.26 for the past decade. JPY fluctuations have largely dropped due to U.S-China agreement to sign a phase-one trade deal and the recent mix of US data which supports a holding period approach from the Federal Reserve and other major central banks.
• According Mohamed A. El-Erian (chief economic adviser at Allianz SE) the “phase one deal” between the U.S. and China is a just a pause in the U.S-China trade conflict. El-Erian wrote: “See it in their own interests to opt for a truce and sell it to the outside world as a steppingstone to a comprehensive peace.” In a long negotiation process, the American and Chinese governments have apparently achieved an agreement, and frothy equity markets and low volatility in the FX markets are interpreting “phase one” as an important truce. This allows for the U.S. and China to take care of short-term domestic issues and to recharge before continuing with the trade war next year.
• Rising crude oil market optimism continues as the United States and China are moving in the right direction to curb their trade war. Crude oil prices topped out last Friday around mid-61 dollars per barrel. Crude has seen a lift in pricing as expectations for global demand are rising for 2020.

Key market events this week

• AUD Private Sector Credit YoY (Nov) – Monday
• CAD Gross Domestic Product MoM (Oct) – Monday
• US Richmond Fed Manufacturing Index (Dec) – Wednesday
• US MBA Mortgage Applications MoM (Dec) – Thursday
• JPY Industrial Production MoM (Nov) – Friday
• US Initial Jobless Claims MoM (Dec) – Friday