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Weekly Market Analysis
Forex Navidad

Karl Schamotta December 23, 2016

– Holiday Consolidation Takes Hold Across Currency Markets

– Sterling Bounces on Q3 GDP Surprise

– Commodities Weaken on Chinese Smog Campaign


‘Tis the night before Trumpmas, and all thro’ the markets,
Not a creature is stirring, not even a terminal mouse;
The shorts are hung on the euro with care,
In hopes that St. Draghi soon will be there;
Those holding dollars are nestled all snug in their beds,
With visions of higher returns dancing in their heads.
And traders in their ‘kerchiefs and investors with their caps,
Are just settling their trades for a long winter’s nap.


With data releases slowing to a trickle and liquidity freezing up, currency markets are undergoing a slow-motion position-squaring process today. The US dollar is down roughly half a percent against the euro and yen, while most emerging market currencies are seeing modest gains as investors seek diversification after a series of massive and largely unidirectional moves over the past month.

Pounds sterling are trading at a modest premium, climbing off a seven-week low overnight, after official statistics were released showing that the British economy expanded at a 0.6 percent pace in the third quarter – a bit faster than the original estimate of 0.5 percent, and much stronger than many anti-Brexit campaigners expected. Traders took profits off the table promptly however, when the current account deficit widened to 5.2 percent of gross domestic product from 4.6 percent in the prior quarter – suggesting that the trade shock’s full impact on growth is yet to come.

Investors in the commodity markets also seem eager to pocket this year’s gains, driving benchmark energy and metals prices downward over the past few sessions. With China engaged in an all-out battle to end an industrial smog “Airpocalypse”, thousands of textile factories, cement manufacturers, power plants and steel mills have been closed over the past week – reducing demand for coal, electricity and other raw materials, while putting pressure on currencies like the Canadian and Aussie dollars.

The greenback’s almost-7 percent post-election rally looks relatively impregnable for now, with relatively meaningless data releases in the docket for the next week and most investors on the sidelines until after the holidays. Anecdotal evidence would suggest that many major asset managers and corporate treasuries have largely completed year-end portfolio rebalancing processes ahead of schedule, meaning that the New Year’s eve panic may be somewhat smaller than usual – although still relevant to those looking to eke out small execution gains.

As is often the case, we may see a continuation of this year’s major currency market trends in the early weeks of the new year – for a variety of reasons, many participants are still beholden to the Gregorian calendar, and tend to place directional trades after January 1st. During this period, we cannot eliminate the possibility that the dollar moves higher – while the euro, sterling and commodity-linked units like the Canadian dollar fall through the support levels that have proven so robust in recent weeks.

However, as John Maynard Keynes once observed, “Successful investing is anticipating the anticipations of others”. While the Trumpflation trade has been a powerful force in markets since the election, today’s anticipatory response will inevitably give way to a new conceptual framework (perhaps within weeks of the inauguration date). Those who exercise prudence and moderation in the next few days and weeks may thank themselves later. Remember to eat and drink lots though.

Happy 2017 to all, and to all a good night.

Karl Schamotta
Follow @vsualst

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