Morning Commentary: Putting Lipstick on a Pig

Foreign Exchange - Morning Commentary

Putting Lipstick on a Pig

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Alan Rose
Alan Rose
Foreign Exchange Head Trader
Equity and commodity markets are attempting to close out 2018 on a positive and upbeat note today after a volatile and emotionally charged last three months of the year where equity and commodity prices buckled. Markets are always looking forward, and investors and traders are fearful of a global economic slowdown and weaker earnings in 2019.
However, these past five trading sessions have seen a change in equity dynamics where buyers are returning to the market and there is an absence of selling pressure; markets appear to have priced in enough negative news for now and longer term buyers are returning again. This is despite underlying economic data in Europe and China (see below) continuing to falter and  increasing signs of a slowdown in the U.S. as numerous headwinds continue to build that are impacting confidence and our economic performance.
Equity markets seem to be reacting to a tweet from President Trump that he spoke with President Xi of China on Saturday, that “big progress” is being made on trade and that negotiations are moving forward toward a comprehensive deal. China state media reported that both sides wanted stable progress. President Trump has a tendency to overstate and over embellish, but for today and in a thin market, markets are attempting to close out the year on an upbeat note.
The U.S. dollar (DXY) is closing the year on a softer note finishing lower the past three consecutive trading days. The foreign exchange market continues to react to the dialing back of any further fed rate increases combined with a government shutdown with no end in sight. The Japanese yen (JPY) has been one of the most favored currencies over the past month appreciating by nearly 3.65%. It is the only major currency to finish 2018 in the black up by 2.50%. We anticipate more U.S. dollar weakness as 2019 unfolds.
  • China heads into the New Year (coincidentally it is the year of the pig!) with its factories moving into contractionary territory as the impact of the trade war and a slowing global economy take their toll. The Chinese manufacturing PMI dropped to 49.4 in December which is the weakest since early 2016. Consensus expectations were for a print of 49.9; November’s reading was at 50.0. Export orders fell for the seventh straight month. Non-manufacturing data (services) did expand from 53.4 to 53.8 as services are becoming a larger part of the Chinese economy.
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