It's A Double Whammy For Risk Appetite On Trade And UK Elections
Matt Simpson December 13, 2019 1:31 PM
It's been a busy few hours for traders and journalists, with a phase one deal between US and China in the pipeline and exit polls predicting a landslide victory for the Conservative party in the UK election.
It’s been a positive week for trade sentiment. Earlier in the week, the USMCA was signed which paves the way for US, Canada and Mexico to move forward on trade. And during the US session, President Trump teased traders with hope of a US -China trade deal by tweeting “Getting VERY close to a BIG DEAL with China. They want it, and so do we!” Within hours, reports surface that US and China have agreed to a phase one trade deal and averted the latest wave of tariffs which were to be unleashed on China on Sunday. The yen broadly weakened and markets were quick to revert to risk-on.
Meanwhile, the British pound jumped sharply higher when exit polls showed the Conservative Party are on track for a landslide victory. With 368 seats pencilled in for Bojo’s majority government, it surely paves the way for a slick Brexit and reports have surfaced that they plan to move on Brexit next Friday. Whilst the official results are yet to be confirmed, it is already looking like a blood bath for the Labour Party with exit polls once again looking quite accurate.
Commodity FX (AUD, CAD and NZD) were quick to react, with the yen also broadly weakening due to the clear risk-on status of markets. Moreover, E-mini futures are at record highs and GBP/JPY has shot higher on the added benefit of a likely conservative win in the UK elections.
- AUD/JPY remains firm but, sitting just off the July highs, is vulnerable to profit taking before we anticipated it to eventually break higher.
- NZD/JPY cut through 71.50 like butter and is now on track to test its July high. Given the positive data form NZ alongside government stimulus in 2020, this could be the preferred long compared with AUD/JPY once the dust has settled and provided a minor pullback or period of consolidation.
- After several whipsaws, CAD/JPY finally reaffirmed its bullish channel and poised to retest its October high. Given the notably weak employment data from Canada these past two months, we’re on guard for BoC to take a more dovish stance in 2020 so its upside potential could be limited compared to NZD/JPY.
- GBP/JPY has the added benefit of a likely (although yet to be confirmed) Conservative Party landslide. Yet we urge caution around current levels due to the upper channel and March high. SO we’d prefer to see a period of consolidation or pullback before becoming bullish below key resistance. That said, the path of least resistance likely points higher overall.
A clear beneficiary of the USMCA is the Mexican Peso. USD/MXN tested a 4.5 month low earlier in the session but has found support around 19.00. Whilst it has fallen -3.3% since the November high, there could be further downside after a potential retracement, given prior declines have fallen -4.6% and -4.3% respectively.
Furthermore, a larger head and shoulders reversal could be in play which, if successful, projects a target near the 2017 lows around 17.50. Admittedly, we’d typically want to see a H&S following a bullish trend, yet if we truly are seeing a turnaround in global trade sentiment, this is certainly a pattern to consider. Still, the pattern could already be in play, we’d prefer to see a break beneath the 2019 lows before assuming a major reversal is indeed underway.
- Over the near-term a bounce form 19 appears likely on a technical basis. Not only due to its round number status, but price action is also testing the bullish trendline from the 2017 low.
- If prices are to repeat a -4.3% or -4.6% decline, it would be headed for the April lows around 17.75.
- Whilst the large head and shoulders pattern could already be in play, we’d prefer to see a break below the 2019 low before assuming a larger breakdown is underway.
From time to time, GAIN Capital Australia Pty Ltd (“we”, “our”) website may contain links to other sites and/or resources provided by third parties. These links and/or resources are provided for your information only and we have no control over the contents of those materials, and in no way endorse their content. Any analysis, opinion, commentary or research-based material on our website is for information and educational purposes only and is not, in any circumstances, intended to be an offer, recommendation or solicitation to buy or sell. You should always seek independent advice as to your suitability to speculate in any related markets and your ability to assume the associated risks, if you are at all unsure. No representation or warranty is made, express or implied, that the materials on our website are complete or accurate. We are not under any obligation to update any such material.
As such, we (and/or our associated companies) will not be responsible or liable for any loss or damage incurred by you or any third party arising out of, or in connection with, any use of the information on our website (other than with regards to any duty or liability that we are unable to limit or exclude by law or under the applicable regulatory system) and any such liability is hereby expressly disclaimed.