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WEALTH
A look at 2020’s FX opportunities
by Andrew Leong
06 Jan 2020
06 Jan 2020
The past 2019 proved quite eventful for the financial markets. U.S. SPX is making new highs while central banks across the globe have signalled a more accommodative stance, bringing global bond yields to multi-year lows.
The year has also brought us some progress in the trade negotiations and Brexit saga. Looking forward, what opportunities and challenges can we expect from the coming 2020?
In this exclusive issue with Portfolio Magazine, we will discuss three main currencies – USD, GBP, and AUD.
- POSITIVITY FOR THE USD
- VOLATILITY AHEAD FOR THE GBP
- AN UNCERTAIN AUD
- WHAT'S THE EFG TEAM TRADING NOW?
The US Dollar is one of the biggest winners in 2019 despite the Fed cutting interest rates three times. While the central bank was on a steady march to raise rates just a year ago, it has spent the past year trying to protect the American economy against threats and keep its expansion growing.
We see this trend too, with most central banks around the world joining in to stimulate their economies. However, the growth of the USD remained relatively high, still outperformed most of the G10 currencies.
This could continue to support the USD in 2020. Moreover, the dollar remains seen as a safe haven currency, and any trade war uncertainty will continue to benefit the USD.
Although a deal has been agreed between the U.S. and China, it has not been codified and signed; hence there is a chance it will not happen.
Looking forward, traders in Federal funds futures are implying a rate of 1.27% by the end of 2020. This, in turn, would indicate around a 56% probability of two cuts by the end of 2020.
Yet, a contrarian view is that the Fed could get back to tightening should inflation continue to ride higher and growth improve. Overall, we remain bullish for USD in 2020 due to the U.S.’s relatively strong growth compared to the rest of the world and its unique status as a safe haven.
- POSITIVITY FOR THE USD
- VOLATILITY AHEAD FOR THE GBP
- AN UNCERTAIN AUD
- WHAT'S THE EFG TEAM TRADING NOW?
Volatility ahead for the GBP
The Sterling rallied as the market priced in a landslide victory by the Conservative Party before paring its gains as Boris Johnson’s plan to set a hard Brexit deadline spooked the market. With less time on hand, the UK may end up leaving the EU without a trade deal.
Meanwhile, EU’s Chief Brexit Negotiator Michel Barnier also warned that a “comprehensive” free-trade deal agreement by 30 December 2020 would be near impossible, and we might see the Pound’s accelerated tumble on heightened fears of a no-deal Brexit.
Elsewhere on the data front, investors will be keeping a close watch on the Manufacturing PMI, Manufacturing Production, Industrial Production, CPI, PPI, Retail Sales, Employment and GFK Consumer Confidence numbers, where missing estimates could cause the currency to extend its decline. This month would also see BOE’s interest rate decision as well as the Brexit deadline.
As the focus remains on the Brexit saga, we are likely to see an increase in volatility of the currency.
- POSITIVITY FOR THE USD
- VOLATILITY AHEAD FOR THE GBP
- AN UNCERTAIN AUD
- WHAT'S THE EFG TEAM TRADING NOW?
An uncertain AUD
The Australian Dollar has been continuing its steady decline against the USD for 2 years in a row. The last time the AUD peaked was in January 2018.
However, it began its decline when US President Trump announced his trade war against China in May 2018. While the trade war between the US and China affects many countries across the globe, the AUD has been the hardest hit given Australia’s relationship with China as a key supplier of raw metals.
To put it into perspective how vital raw metals are to the Australian Economy: Australia is the world’s largest exporter of Iron Ore and the 4th largest exporter of both copper and gold.
The risk-off sentiment that carried over from 2018 can also be seen in metal prices throughout 2019. Copper has been drifting lower throughout the year, showing signs that developing and industrial economy demands are slowing.
Gold is a precious metal that strongly correlates with risk aversion, which has risen strongly this year. The AUD made a new 10-year low at the 0.667 regions towards the end of this decade and tested it once again in October 2019.
Looking forward, should the AUD break below its 10-year low, there is a high possibility that the AUD could weaken even further to the Global Financial Crisis lows of 2008 at the 0.62 level. We are only likely to see the AUD erasing it’s 2-year long losses if the global trade and political turmoil settles, and deals are reached and signed, as this will allow risk-on sentiment to come back into the markets.
- POSITIVITY FOR THE USD
- VOLATILITY AHEAD FOR THE GBP
- AN UNCERTAIN AUD
- WHAT'S THE EFG TEAM TRADING NOW?
What's the EFG team trading now?
From a technical analysis point of view, AUD has been weakening against the USD since mid 2011s. The Elliott Wave Theory shows us that price has already completed what seems like the 4th wave and is now making a push lower to complete its final 5th wave.
Moreover, AUDUSD had made a new 10-year low around the 0.667 regions around mid-2019. This low was tested once more in October 2019.
Another thing to note would be that price is holding steadily below its natural moving average of the 13-months exponential moving average (EMA) and 50-months EMA. The distance between these moving averages also measures the long term momentum of price.
Looking at the chart, the wider the gap between the 13 EMA (blue) and 50 EMA (red), the stronger the upward or downward trend of the market. Since 2018, the distance between these two moving averages have been steadily widening, showing that the downward momentum of the AUDUSD pair is only growing stronger.
In terms of price movement, it is essential to point out that within an uptrend, price tends to make a strong upwards push of about 3000 pips when the market reacts off the 50 EMA (red). This measurement can be seen in the chart highlighted by the blue boxes. On the flip side, price tends to make a strong downwards push of about 2700 pips within a downtrend when the market reacts below the 50 EMA.
This can be seen in the chart highlighted by the red boxes.
Should price show a clear break below its 10-year low anytime in 2020, we can expect the price to drop towards the next support at 0.608, which is also the same lows seen during the 2008 Global Financial Crisis (GFC). The weakening of the AUD can be attributed to multiple factors, with the critical factors being that the US-China trade war is unable to come to an agreement, or that the deal is just not in China’s favour. Investors should continue to monitor this 10-year low price level closely.
For a visual chart of our analysis, head over to this link.
Contributed by Andrew Leong, COO of Everest Fortune Group.
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