U.S. Dollar Risks: Impeachment, Data, North Korea

U.S. Dollar Risks: Impeachment, Data, North Korea

Kathy Lien  | Dec 23, 2019 14:36

Daily FX Market Roundup 12.23.19

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management

First, I’d like to wish all of our readers a very happy holiday. It has been a genuine pleasure writing for you this year and I hope that you’ve enjoyed my commentary. We’ve got some exciting announcements in the coming year so please look out for our emails.

It should be no surprise that trading was quiet on Monday, which was the last full day for the markets before the Christmas holidays. For anyone who hasn’t taken the next 2 weeks off, it's half day for most traders on Tuesday with all markets closed on Wednesday. Although U.S. markets reopen on Thursday, many European and Asian markets remain closed for Boxing Day. Less participation means less liquidity, which generally leads to tighter trading ranges but it can also provide the perfect backdrop for violent breakouts. That was the case in 2019 when USD/JPY dropped 4% in a matter of minutes on Thursday January 3. Part of the move was attributed to trade concerns and profit warning from Apple (NASDAQ:AAPL) but the catalyst was low liquidity and beginning-of-the-year position adjustments.

In the last few weeks, we’ve seen relatively narrow trading ranges for EUR/USD and USD/JPY, which suggests that a breakout is imminent. There are no shortages of potential triggers such as a possible missile launch from North Korea on Christmas, a response from the U.S., the risk of a step-back in U.S.-China trade relations, ongoing Brexit uncertainty, Trump impeachment risk or beginning-of-the-year panic selling. U.S. data has been disappointing and concerns are growing that the Federal Reserve may need to lower interest rates again in 2020.

There’s very little economic data on this week’s calendar but the data released on Monday reinforced the slowdown in the U.S. economy. U.S. data has taken a turn for the worse at the end of the year so while all of the major economies will have avoided recession in 2020, U.S. growth in particular could weaken before it improves. The unexpected decline in durable goods reported Monday reinforces the weakness seen in other manufacturing measures. Although new home sales rose on a percentage basis, on an absolute basis, existing and new home sales lower in November compared to October. All of this means that the record-breaking moves in U.S. stocks is unsustainable and with data softening, there is serious risk of a correction in 2020.

The Canadian dollar also slipped following softer GDP data. According to the latest reports, Canada’s economy contracted 0.1% in October. Over the past few weeks, the CAD has been very strong despite softer retail sales, labor and now growth data. Like U.S. equities, it should be difficult for the loonie to extend its gains in the coming weeks. The Bank of Canada may be comfortable with monetary policy but if U.S. growth slows further and Canadian data continues to soften, there could be easing in 2020.

The sell-off in sterling deepened on Monday as the currency continued to give up its election gains. UK lawmakers backed Prime Minister Boris Johnson’s plan to leave the European Union on January 31. With this Brexit bill, the UK would have until December 31, 2020 to negotiate a trade deal with the EU. It also increases the possibility of a no-deal Brexit, which Johnson is amenable to if no deal is reached. In the meantime, data has been weak and likely to remain subdued in the coming year unless Boris Johnson fast tracks a deal with the EU.

Meanwhile, the Australian and New Zealand dollars extended their gains as the euro rebounded. There were no economic reports from down under but German import prices rose more than expected. While euro could see further recovery, after selling off hard last week, the gains in AUD and NZD are getting overextended with the latter a prime candidate for year-end profit taking.

Kathy Lien

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