As we come closer to the end of 2018, the currency market consolidates tight ranges in most of the important pairs. For the first time in years, the focus doesn't sit with the USD or the FX market's volatility, but with the global stock market.
The bastion of bullish stock market price action seems to have given up as the DJIA and the S&P 500 in the United States entered recessionary territory. Stock indices around the world followed the U.S. stock markets' lead in a free-fall.
As usual this time of the year, liquidity is scarce. Because financial markets are interconnected, the troubles on the stock market easily transpired to other parts of the financial spectrum. Risk-on currencies, for instance, were hit first.
The JPY was the first to react. Failing to break and hold above the all-important 114-115 area. It turned around all the way to the round 110 mark. The magic of the round number did the trick so far, but with pressure building on the bearish side on the stock market, it is just a question of time until breaking lower.
When investors pull off risky assets, they return the loans in the currency used to borrow. Moreover, the JPY move higher is here to stay for as long as the stock market rout continues.
Oil added fuel to the fire. Having a strong inflationary component, it dictates in most of the cases the monetary policies around the world.
The current drop below the $50 mark spreads worries as it comes with a deflationary component in the period ahead. The main beneficiary: USD/CAD bulls as the pair sits at the 1.36 gates.
It was, in fact, one of the trades of the year, being long USD/CAD as it rose from well below the 1.30 mark to the current elevated levels.
With the Fed in open conflict with the White House (i.e. Trump is unhappy with the Fed raising rates and the current federal funds level) and the Government in shut-down mode, everyone waits to see what 2019 will bring.
Until then, the trading algorithms dominate selling and buying as most people enjoy their holidays. However, if all hit the selling button at the same time, the holiday period may end up being a blood-bath for bulls, bringing vengeance to bears. One way or the other, this Christmas/New Year's market price action looks bearish enough to keep everyone connected with what's happening in the markets.