Today we embark upon the first trading day of 2020 following a busy but ultimately unremarkable year for foreign exchange markets. Despite general elections, impeachment and monetary chaos clocks haven’t stopped ticking and markets have continued to function. One of the best performing currencies this year has been the newly crowned leader of major global interest rates, the Canadian Dollar. The loonie started off the year around 1.36 versus the US Dollar and following a strong final session of 2019 pushed below 1.30. Still, a six cent gain on the greenback in twice as many months is small change given such an important shift in the global monetary backdrop.
I wrote to you on Tuesday speaking of how risk asset positioning demonstrated investors’ positioning for a turbulent 2020. After all, with the median investor tending to be risk averse and 2019 showing just how unstable the political-economic climate can be, why would markets price in anything else? But this positioning brings with it two important facts that should guide your engagement with foreign exchange markets over the next 12 months – a dichotomy.
Indices of foreign exchange volatility have been at record lows. The VIX, a popular measure of volatility based upon implied volatility in the US stock markets still trades this morning below the important 15 handle. With a confident move above 20 only in the month of August, markets continue to struggle with low volatility. With market participants positioned towards further downside protection, you would be forced to conclude that markets are well balanced with major currencies therefore likely to continue to trade within their current ranges.
The dichotomy we face this new year is business as usual or a complete shake up. If markets continue to be positioned with a bias towards insurance from expected turbulence then when they get the political and economic instability that they expect, little will change and we continue to end up with a stagnant buy-the rumour; sell-the-news type of trading. However, if the hyper-loose monetary problem is resolved and political developments are less severe than in 2019 then a risk-on move could spark some volatility at last with present positioning quickly liquidated in favour of more constructive bets.
Outside of foreign exchange, the impact of unwinding of hyper-low interest rates could have mixed impacts on equity markets. US stocks have concluded one of their best years in the past decade with the S&P 500 picking up 29% and $5.9 trillion in value. Part of this appreciation has in good part been Jay Powell’s QE-not-QE policy program. Therefore, an unwinding of the bond rally headache whilst benefiting risk could ultimately prove to be a negative factor for equity markets. With any luck, a total shake up of present conditions and normal correlations will lead to good opportunities in the foreign exchange market and it will be our pleasure for the next year, 12 months, 366 days and more, to guide you through it.
Discussion and Analysis by Charles Porter