What Happens to FX During the Holiday Season?

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Market Drivers December 19, 2014

BOJ statement shows no change
UK Public Sector Net Borrowing 13.4B vs. 14.8B
Nikkei 2.39% Europe 0.51%
Oil $54/bbl
Gold $1196/oz.

Europe and Asia:
NZD Business Confidence 30.4 vs. 31.5
EUR Current Account 20.5B vs. 27.8B
GBP UK Public Sector Net Borrowing 13.4B vs. 14.4B

North America:
CAD Retail Sales 8:30

It’s been a very choppy consolidative session on the last trading day of the week as many dealing desks have started to close their books for year end and the economic calendar has thinned appreciably.

Most of the majors have spend Asian and early European trade marking out 30-40 pip ranges in lackluster directionless trading. The one exception was USD/JPY which popped above the 119.00 level and moved all the way towards 119.50 on the back of BOJ meeting announcement that showed no policy change but nevertheless reaffirmed the central bank’s commitment to more stimulus.

With holiday season nearly upon us it may be worthwhile to examine FX scenarios during this upcoming period. Generally markets tend to become very quiet at the end of the year, with most of the key participants away from their desks as liquidity dries up considerably. Under such conditions any geopolitical or economic shocks tend to overstate the price movements as reactions can quickly overextend.

This year however, most of the key geopolitical and economic surprises have occurred in the first two week of the month, with decline in oil, collapse of the ruble and negative rates from SNB all driving trade and volatility. With markets having now reacted to all the various dislocations, chances are that price action will remain subdued for the rest of the year as most of the risks have been priced in.

With very little fresh economic data planned for the next two weeks, the risk to the market lies primarily from some political surprise from rogue nations such as North Korea. Barring such unforeseen development the global news cycle is likely to be placid over the next few weeks and prices will most likely reflect that decline in volatility.

Finally a note on the high yielding comm dollars like the Aussie and kiwi. Some analysts have noted that the move to negative rates by the SNB should only increase demand for the high yielders as European monetary authorities do everything in their power to generate liquidity and depreciate exchange rates. Certainly for a Swiss denominated investor it is far more lucrative to keep his capital in high yielding AU instruments rather than pay negative carry.

Yet so far the market has not flocked to the high yielders, fearing that the economic slowdown in the Asia Pacific region will eventually force the authorities to cut rates next year.Yet both Australian and New Zealand policy makers have shown no inclination to cut rates in 2015 with the New Zealand authorities taking a particularly hawkish view on rates. If conditions in Asia show some stabilization and even a modicum of improvement, market sentiment will change quickly and both the Aussie and the kiwi could once again find a bid as yield hungry bargain hunters plow back into those currencies.

I will be out until January 5 – Happy holidays to all.

Boris Schlossberg
Managing Director

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