Morning Commentary: The New Normal – Part 2

Foreign Exchange - Morning Commentary

The New Normal – Part 2

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Mohammed El-Erian coined the term "the New Normal" in 2009 referring to his prescient prediction that after the Great Recession, the U.S. and global economies would be experiencing subdued and subpar growth for many years. That forecast turned out to be extremely accurate despite all the extraordinary monetary measures (QE and negative interest rates) supplied by the major central banks of the world. While the U.S. economy has finally escaped the subdued 2.0% growth that it was trapped in for many years, there seems to be a new twist to the definition of "New Normal."
 
The new twist that seems to have become part of the markets ever since October is the extreme volatility and unpredictability in the price action of many asset classes and in particular, that of U.S. and global equities. This week has been thin due to a lack of participants, but the price action has been extraordinary. The DJI fell almost 3% on Monday only to rise by nearly 5% yesterday and is scheduled to open down by nearly 1.50% today.
 
We anticipate this new volatility and whipsaw price action to be a regular feature of the markets as there are just way too many conflicting story lines regarding the state of the U.S. economy, Fed policy, trade policy, Brexit, political dysfunction in Washington and whatever else you want to throw into the mix. While equities, interest rates, and commodity prices have all been extremely volatile, one asset class has been relatively immune to all the extreme volatility.
 
The U.S. dollar (DXY) over the past two months is almost exactly where it was in late October. While there has been weakness in commodity-linked currencies (NOK, CAD, MXN), that has been offset by an appreciation of safe haven currencies (JPY, CHF). The next most important currency to the U.S. dollar is the euro, and it is unchanged from two months ago. 
 
The DXY index has reflected the emotional state of other asset classes but has traded in narrower ranges and remained largely range bound. This lack of direction may last for weeks or months but we anticipate a gradual weakening of the DXY as the New Year unfolds. Our FX forecast will be released over the next few days.
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