It's A Double Whammy For Risk Appetite On Trade And UK Elections
Matt Simpson December 12, 2019 9:31 PM
It's been a busy few hours for traders and journalists, with a phase one deal between US and China in the pipeline and exit polls predicting a landslide victory for the Conservative party in the UK election.
It’s been a positive week for trade sentiment. Earlier in the week, the USMCA was signed which paves the way for US, Canada and Mexico to move forward on trade. And during the US session, President Trump teased traders with hope of a US -China trade deal by tweeting “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Within hours, reports surface that US and China have agreed to a phase one trade deal and averted the latest wave of tariffs which were to be unleashed on China on Sunday. The yen broadly weakened and markets were quick to revert to risk-on.
Meanwhile, the British pound jumped sharply higher when exit polls showed the Conservative Party are on track for a landslide victory. With 368 seats pencilled in for Bojo’s majority government, it surely paves the way for a slick Brexit and reports have surfaced that they plan to move on Brexit next Friday. Whilst the official results are yet to be confirmed, it is already looking like a blood bath for the Labour Party with exit polls once again looking quite accurate.
Commodity FX (AUD, CAD and NZD) were quick to react, with the yen also broadly weakening due to the clear risk-on status of markets. Moreover, E-mini futures are at record highs and GBP/JPY has shot higher on the added benefit of a likely conservative win in the UK elections.
- AUD/JPY remains firm but, sitting just off the July highs, is vulnerable to profit taking before we anticipated it to eventually break higher.
- NZD/JPY cut through 71.50 like butter and is now on track to test its July high. Given the positive data form NZ alongside government stimulus in 2020, this could be the preferred long compared with AUD/JPY once the dust has settled and provided a minor pullback or period of consolidation.
- After several whipsaws, CAD/JPY finally reaffirmed its bullish channel and poised to retest its October high. Given the notably weak employment data from Canada these past two months, we’re on guard for BoC to take a more dovish stance in 2020 so its upside potential could be limited compared to NZD/JPY.
- GBP/JPY has the added benefit of a likely (although yet to be confirmed) Conservative Party landslide. Yet we urge caution around current levels due to the upper channel and March high. SO we’d prefer to see a period of consolidation or pullback before becoming bullish below key resistance. That said, the path of least resistance likely points higher overall.
A clear beneficiary of the USMCA is the Mexican Peso. USD/MXN tested a 4.5 month low earlier in the session but has found support around 19.00. Whilst it has fallen -3.3% since the November high, there could be further downside after a potential retracement, given prior declines have fallen -4.6% and -4.3% respectively.
Furthermore, a larger head and shoulders reversal could be in play which, if successful, projects a target near the 2017 lows around 17.50. Admittedly, we’d typically want to see a H&S following a bullish trend, yet if we truly are seeing a turnaround in global trade sentiment, this is certainly a pattern to consider. Still, the pattern could already be in play, we’d prefer to see a break beneath the 2019 lows before assuming a major reversal is indeed underway.
- Over the near-term a bounce form 19 appears likely on a technical basis. Not only due to its round number status, but price action is also testing the bullish trendline from the 2017 low.
- If prices are to repeat a -4.3% or -4.6% decline, it would be headed for the April lows around 17.75.
- Whilst the large head and shoulders pattern could already be in play, we’d prefer to see a break below the 2019 low before assuming a larger breakdown is underway.
Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.
Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.