This is the time of year when market participants reflect back over the past 12 months to review the events which impacted currency flows and prepare for profitable opportunities in the new year.
Along these lines, we expect the ongoing trade dispute between China and the US to expand into Europe and Japan. We also believe that the European Parliamentary elections will have a bearing on the market as well the final reconciliation of the UK Brexit drama.
However, it’s our overarching view that domestic interest rate expectations (and the divergence therein) will continue to be the primary driver of currency price trends throughout 2019.
During 2018, the USA, Canada and the UK were the only G-7 nations which lifted interest rates: the US FED raised rates four times for a total of 100 basis points, while the BoC and BoE both snugged their overnight lending rates by 25 basis points (BP).
Looking ahead into 2019, the FED has signalled at least two rate hikes while the other six G-7 central banks have not expressed any intentions of tightening credit conditions.
More specifically, the ECB discontinued its QE purchases last month with the hopes of a slight adjustment from -40 BP to -30 BP during Q2 of 2019. The recent string of weaker Euro zone growth and inflation data has dashed these hopes and the ECB is likely to remain idle throughout all of next year.
In Japan, the BoJ has all but given up on scheduling any monetary adjustments higher and seems to making up their fiscal policy operations as they go along.
Similarly, with Australian consumers saturated with household debt, the RBA is now expected to lower the benchmark overnight rate from the historic low of 1.5% to 1.25% sometime in Q2.
In summation, it’s our base case that the moderate, but steady growth in the US will continue to underpin the interest rate divergence market theme and keep the USD uptrend intact throughout 2019.
The EUR/USD failed to challenge the double top area of 1.1480 during last week’s trade and now looks likely to trade back below 1.1380 to start the new year. We are currently short the pair from 1.1430 and suggest adding to short positions at 1.1465, with an initial target of 1.1210 and a 1.1565 stop.
The USD/JPY held above 110.00 going into the weekend but internal momentum indicators are still pointing lower. With the daily RSI rising slightly from 25.00 to 34.50 over the last three days, the oversold conditions have been neutralised and now look ready to probe a new low below 110.00.
We closed out our long position from 110.10 at 110.60 on Friday for a 50 point profit. We suggest short-term Forex traders can look to buy USD/JPY at 109.25 with an initial target of 114.10 and a 108.40 stop.
Since the sharp break lower on December 21st, the AUD/USD has been contained in a 60 point range between .7025 and .7085. Technically, only a move above .7155 would negate the downtrend and signal the potential for a significant bottom in place. We still prefer the short side of the pair as interest builds on the positive carry of being long USD.
We are currently short from .7310 and suggest adding to short positions at .7085 with an initial target of .6930 and a .7185 stop.
The Sterling has traded on both sides of the 30-day moving average of 1.2690 during today’s Asian time-frame. Not surprisingly, the technical picture is neutral and the flow appears to be thin. Our suggestion to add to short positions at 1.2740 was no filled, leaving us short from 1.2680. We suggest holding short from 1.2680, or better, with an initial target of 1.2530 and a 1.2815 stop.
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