27 Dec 2018: Turmoil as equities crash, then recover

Turmoil as equities crash, then recover

December 27th: Highlights

  • Dow Jones losses extend to Asia, Gold rallying
  • Sterling awaits reaction as no deal prospects set in
  • Euro to rally in early 2019 as USD suffers

Dollar lower as Trump blames everyone else

President Trump popped up in Iraq yesterday to thank the U.S. troops stationed there for their service. At home in Washington before he left he continued to blame all and sundry for the collapse in equity prices over the past few weeks.

While he continued to lay the door firmly at the door of the Federal Reserve, Treasury Secretary Steve Mnuchin was damned with faint praise. While described as “very talented”, Mnuchin’s actions in calling six major U.S. bank CEO’s at the weekend to reassure them that there was sufficient liquidity available to handle any upcoming crisis added fuel to the flames of the equity market collapse.

The market took the view that there is “no smoke without fire” and despite Mnuchin’s action being designed to calm any fears, they had the opposite effect.

FX traders will today have their first opportunity since Monday when conditions were extremely thin to act upon what is happening in the U.S. Overnight, the dollar index lost ground reaching a low (0530GMT) of 96.77.

The Dow Jones Index, which is trading extremely nervously, rose by more than 1000 points yesterday as reports of robust Christmas period activity in the retail industry provided relief over the state of the economy. It is likely to be a volatile end to the year with rumour being in greater supply than hard fact.

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Euro boost from Italian agreement fades

The jury is out on who won the first round of what is expected to be several clashes between Rome and Brussels over various parts of the control of the Italian economy by the EU.

The Coalition Government in Rome was elected on a Nationalist platform yet it is interesting that Italians themselves remain firmly European despite railing against the restrictions that being members of the Eurozone bring.

This brings into play a possibility that any “Italexit” that is promoted by the Government will mean Rome leaving the Eurozone but remaining members of the EU. If we thought Brexit was complicated such a deal would bring about an almost impossible set of circumstances since the end of the Euro and the return of the lira would wreak utter chaos upon the Italian economy.

With the economy slowing and the ECB having no tools left to fix the issues (unless it reverses its removal of the Asset Purchase Plan), the single currency may see further falls early in the new year as the dollar remains in the curious position of being at the centre of the crisis of confidence currently affecting U.S, markets, but still a safe haven currency in times of market stress.

The euro is trading between 1.1350 and 1.1470 versus the dollar for now and is unlikely to move out of that range in the short term unless there is a significant “black swan” event.

Euro remains an enigma

It is not easy to trade the single currency successfully. The number of factors that affect its level against other currencies is often overshadowed by the performance of those other currencies or the significant weighting it has in the dollar index.

While it is the clear desire of the EU Commission to have the euro considered a global reserve currency since liquidity in the market easily rivals that of the dollar it is unlikely to receive that status since the window of opportunity is narrowing with the rise of the Chinese currency to greater prominence despite global concerns over the independence of the Yuan from Government policy.

The ECB policy of considered and accurate advance guidance which this year centered around the winding down of the Asset Purchase Scheme and benign neglect of short-term interest rates has taken away volatility. The Central Bank’s default position is well known and the market can afford to be data-driven, understanding that nothing will change provided economic activity remains positive and inflation controlled.

On Friday the single currency fell despite an air of relief over the deal reached between Rome and Brussels over the Italian budget deficit, even if it is considered by most to be a fudge with the real battles still to be fought. It reached a low of 1.1355 and closed very close to that level, driven by the rally in the dollar index.

Have a great day!

About Alan Hill

Alan has been involved in the FX market for more than 25 years and brings a wealth of experience to his content. His knowledge has been gained while trading through some of the most volatile periods of recent history. His commentary relies on an understanding of past events and how they will affect future market performance.”