Forex News and Events
Trump’s speech in focus
Donald Trump’s election as 45th US President has triggered an impressive rally in most asset classes. US treasury yields exploded as inflation expectations picked up. The equity market rallied sharply with the Dow Jones Industrial Average flirting with the famous 20,000 threshold. Finally, the US dollar appreciated on a broad basis with the dollar index testing levels last seen in 2003. On the other hand, the Mexican peso has been through hell over the last few weeks sliding more than 20% since November 9th, with a fall of almost 5% since January 1st.
The question that everyone is asking is obviously: was the Trump rally justified or are we ahead of a massive correction? As a matter of fact, investors have already started to take profit - at least partially in the dollar trade - as the greenback takes a breather and even loses ground against high-quality commodity currencies such as the Aussie and the kiwi.
Similarly, US treasury yields have also started to ease somewhat with the 10-year yields edging down 26bps to 2.38% after hitting 2.64% on December 15th. On the short-end of the curve, 2-year yields fell 12bps, down to 1.1825% from 1.30%. In the equity market, the rally is also running out of steam with the S&P 500 stuck below 2,300 points level, while the Dow Jones is unable to break the 20,000 points threshold to the upside.
For now, investors are waiting for Trump to give them some inkling on whether he will hold on to his promises - or rather which promises he will hold on to and which ones he will drop. Indeed, there is no doubt that some of his campaign promise will never materialise. The key is finding out which ones. The President-elect is expected to give a news conference this afternoon at GMT 16:00. Be ready for a choppy afternoon.
MXN
Political uncertainty continues to drive MXN lower. Despite Banxico's FX intervention, selling $2bn worth of USD on 5th and 6th ($165bn in FX reserves) with the goal of “providing liquidity and reducing volatility”, USD/MXN has broken recent highs, touching 21.84. Yesterday’s move was triggered by the mere anticipation of President-elect Trump’s press conference, which is generating massive outflows from MXN into USD.
Trump’s nomination of anti-trade personalities such as Wilder Ross and Peter Navarro has only hardened expectations for a protectionist shift. While the Mexican economic outlook has deteriorated and the risk of a trade war with the US has increased, domestic economic data remains decent. Today’s expected release of industrial production should indicate a recovery of 0.5% from -1.5% fall in the prior read. Yet, ironically the fate of the MXN is at the mercy of Trump’s Twitter feed. Banxico will remain vigilant but there is little prospect of action, redirecting the market’s bias. With the exception of MXN, CNY and TRY, EM currencies are enjoying decent demand with volatility broadly dropping, indicating that should Trump change his language on MXN we could get a significant recovery kick in MXN.
UK economic data improve sharply
Economic fundamentals continue to be closely scrutinised as the post-Brexit nightmare has yet to materialise. Industrial and manufacturing production are on their way up. This morning, both data came in at 2% and 1.2% y/y respectively, making it seem as though Brexit has actually provided some relief to the UK.
For the time being, the weak GBP is driving exports and while we believe that there are still uncertainties concerning the triggering of Article 50, financial markets are still assuming this will go ahead, which is why we are seeing such a weak pound. Over the past year, the pound has depreciated roughly 17% against the greenback and just short of 15% against the single currency, which is providing a competitive edge to the manufacturing and industrial sectors.
We believe that the consequences of Brexit are overestimated. Markets are pricing in the pound’s difficulties to be a result of its proposed exit from the EU. We remain cautious as later this month, the UK’s Supreme Court decision on whether Parliament will need to vote on Brexit could majorly complicate the country’s departure. In any case, reloading GBP position may indeed be the trade of 2017!
EUR/JPY - Bouncing On And Off. 
The Risk Today
EUR/USD failure to test 1.0653 (30/12/2016 reaction high) resistance has led to a mild correction towards 1.0506 support. Next hourly support lies at 1.0341 (03/01/2017 low). Expected to see continued further monitoring of the resistance area around 1.0600. In the longer term, the death cross late October indicated a further bearish bias. The pair has broken key support given at 1.0458 (16/03/2015 low). Key resistance holds at 1.1714 (24/08/2015 high). Expected to head towards parity.
GBP/USD is heading downwards towards hourly support at 1.2083 (25/10/2016 low) while hourly resistance lies at 1.2268 (intraday high). The technical structure suggests further downside. The long-term technical pattern is even more negative since the Brexit vote has paved the way for further decline. Long-term support given at 1.0520 (01/03/85) represents a decent target. Long-term resistance is given at 1.5018 (24/06/2015) and would indicate a long-term reversal in the negative trend. Yet, it is very unlikely at the moment.
USD/JPY is still bouncing on former resistance given at 114.83 settling in current 2-month 116.12 to 118.66 range. Hourly support lies at 114.74 (12/12/2016 low). Expected to see further range trading. We favor a long-term bearish bias. Support is now given at 96.57 (10/08/2013 low). A gradual rise towards the major resistance at 135.15 (01/02/2002 high) seems absolutely unlikely. Expected to decline further support at 93.79 (13/06/2013 low).
USD/CHF tends to weaken. Yet, the pair is still moving sideways between hourly resistance given at 1.0344 (15/12/2016 high) and support at 1.0021 (08/12/2016 low). Key support is given at the parity. Expected to further consolidate around 1.0200. In the long-term, the pair is still trading in range since 2011 despite some turmoil when the SNB unpegged the CHF. Key support can be found 0.8986 (30/01/2015 low). The technical structure favours nonetheless a long term bullish bias since the unpeg in January 2015.
