Morning Commentary: Front Running?

Foreign Exchange - Morning Commentary
Front Running?
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Alan Rose
Alan Rose
Foreign Exchange Senior Trader
The U.S. dollar index (DXY) is ending the year almost exactly where we began the year.  The DXY index outperformed through the first nine months of the year as investors and traders saw the U.S. economy continuing to outperform its peer group (supported by three Fed rate cuts) as reduced trade flows and volumes negatively impacted many key exporting country’s GDP. The DXY has been slowly correcting lower ever since the U.S. – China trade talks got back on track in September as the market anticipates improving trade flows and growth in Europe, Asia and the emerging market sector.

As we approach year end, the DXY index has fallen for five consecutive days against almost all major and emerging market currencies with the British pound appreciating by nearly 2% with many Eastern European emerging market currencies appreciating by nearly 1.70%. While the U.S. economic expansion is forecast to continue into 2020, investors and traders seem to be front running and anticipating better growth from countries that have been weakened by the trade war and are diversifying their portfolios to reflect those changes in future economic conditions.

Predicting foreign exchange rates is a nuanced art. Correlations with equities, interest rates, and commodity prices are a constant moving target.  Many economists are predicting a slightly weaker DXY for next year; our own foreign exchange forecast for 2020 will be coming out shortly and we are also slightly tilted in that direction of a slightly weaker dollar. Having watched exchange rate movements over multiple decades, there are many times that exchange rates follow consensus forecasts and other times surprise and shock conventional wisdom. We will soon find out if the past five days of trading are a reliable indicator for what to expect in Q1 2020.
  • China reported its official PMI readings for December. Manufacturing PMI came in a tick stronger than expected at 50.2 while non-manufacturing fell more than expected to 53.5 from 54.4. Readings above the 50 level imply that the economy is expanding. In addition, the official Chinese press is reporting that Vice Premier Liu will travel to the U.S. this Saturday to sign Phase One of the trade deal.
  • U.S. Case-Shiller S & P 20-City Composite home price index beat expectations by rising 2.23% YoY in October which is the largest increase since May. Prices rose in 19 of the 20 cities with Phoenix posting the largest increase of 5.8% followed by Tampa at 4.9%. San Francisco was the only city to post a YoY decline.
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