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FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

Christopher Vecchio, CFA, Senior Strategist

FX Week Ahead Overview:

  • The first week of a new month and a new year brings an acute focus on the North American currencies and economies.
  • Monthly seasonality for January is favorable towards risk appetite in FX markets, with the Canadian Dollar and Euro among the top historical performers against the US Dollar.
  • The major USD-pairs have seen retail trader positioning produce a lack of clarity during the holiday trading period.

01/05 TUESDAY | 12 GMT | USD Georgia Senate Runoff Elections

With the Georgia Senate Runoff Elections on Tuesday, the composition of the next Senate will be known shortly thereafter, as will the state of gridlock in Washington, D.C.. A Democratic sweep (creating a 50-50 tie in the Senate, resolved by Democrat Vice President-elect Kamala Harris’ tiebreaking vote) would likely mean much more fiscal stimulus, and thus more pressure on US real yields, which has been negative for the US Dollar over the past nine-plus months.

But in the likely scenario that a Republican sweep keeps control of the Senate in Republican hands (51-49 or 52-48 margin), the prospect for more fiscal stimulus subsides fairly quickly, and so too does a significant downside pressure cultivating negative real US yields. Given how the market has been maintain a net-short US Dollar positioning in the futures market, a break in the negative-USD news flow could provoke a short-term reversal in the DXY Index at the start of the year – even if the prevailing, long-term view remains bearish.

IG Client Sentiment Index: USD/JPY Rate Forecast (January 4, 2021) (Chart 1)

FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

USD/JPY: Retail trader data shows 66.20% of traders are net-long with the ratio of traders long to short at 1.96 to 1. The number of traders net-long is 3.00% higher than yesterday and 6.86% higher from last week, while the number of traders net-short is 20.05% higher than yesterday and 10.39% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/JPY prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/JPY trading bias.

01/07 THURSDAY | 10 GMT | EUR Core Inflation Rate Flash (DEC)

The flash December Eurozone core inflation rate is due on Thursday, two weeks ahead of the first European Central Bank meeting of 2021. According to Bloomberg News, the headline Eurozone inflation reading is due in at +0.2%, unchanged from +0.2% in November (y/y). Needless to say, with price pressures running far below the ECB’s medium-term target of +2%, and now that the Euro is starting to rise close to +5% above its year-end target, ECB policymakers may begin to ruffle their dovish feathers over the coming weeks.

IG Client Sentiment Index: EUR/JPY Rate Forecast (January 4, 2021) (Chart 2)

FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

EUR/JPY: Retail trader data shows 41.35% of traders are net-long with the ratio of traders short to long at 1.42 to 1. The number of traders net-long is 10.97% higher than yesterday and 32.83% higher from last week, while the number of traders net-short is 4.19% higher than yesterday and 25.10% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/JPY prices may continue to rise.

Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current EUR/JPY price trend may soon reverse lower despite the fact traders remain net-short.

01/05 THURSDAY | 12 GMT | MXN Inflation Rate (DEC)

The December Mexican inflation (CPI) report will be released on Wednesday, January5 at 13:00 GMT. According to a Bloomberg News survey, a slight moderation in price pressures is anticipated with the headline inflation rate due in at 3.15% from 3.33% in November. Although the Mexican Peso has been a high flyer in recent weeks, a changing of the guard at Banxico thanks to Mexican President Andres Manual Lopez Obrador’s nomination of Galia Borja Gomez, a policymaker with known dovish leanings, as deputy governor, alongside weakening price pressures (not surprising given the coronavirus pandemic), may see Banxico’s hawkish tilt fade in 2021.

01/08 FRIDAY | 13:30 GMT | CAD Employment Change & Unemployment Rate (DEC)

Seven months of positive Canada jobs data may hit an abrupt halt in December, according to Bloomberg News surveys. Consensus forecasts suggest that the December Canada jobs report will show the economy shed -30K workers, after gaining +62.1K in November. As such, the unemployment rate is due to rise to 8.6% to 8.5% after falling for six consecutive months. A negative jobs print would be the first since Canada produced historic losses in March (-1.01M) and in April (-1.994M).

IG Client Sentiment Index: USD/CAD Rate Forecast (January 4, 2021) (Chart 3)

FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

USD/CAD: Retail trader data shows 68.00% of traders are net-long with the ratio of traders long to short at 2.12 to 1. The number of traders net-long is 4.15% lower than yesterday and 3.58% lower from last week, while the number of traders net-short is 12.59% higher than yesterday and 15.08% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USD/CAD prices may continue to fall.

Positioning is less net-long than yesterday but more net-long from last week. The combination of current sentiment and recent changes gives us a further mixed USD/CAD trading bias.

01/08 FRIDAY | 13:30 GMT | USD Nonfarm Payrolls & Unemployment Rate (DEC)

Like is northern neighbor, the United States economy may see a negative jobs report in December. Although the consensus survey from Bloomberg News still calls for +50K jobs added, that estimate has been slowly revised lower in recent weeks, having been cut in half in just the first four days of the new year alone. Weakness in the reporting period’s initial claims data suggests that nonfarm payrolls posting a contraction shouldn’t be dismissed. But will the NFP report change anything? Likely not, unless the Georgia Senate Runoff Elections yield a Democratic sweep.

IG Client Sentiment Index: EUR/USD Rate Forecast (January 4, 2021) (Chart 4)

FX Week Ahead - Top 5 Events: Georgia Senate Runoff Elections; Eurozone & Mexico Inflation; Canada & US Jobs

EUR/USD: Retail trader data shows 33.46% of traders are net-long with the ratio of traders short to long at 1.99 to 1. The number of traders net-long is 4.74% lower than yesterday and 4.22% lower from last week, while the number of traders net-short is 15.56% higher than yesterday and 5.66% higher from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EUR/USD prices may continue to rise.

Traders are further net-short than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger EUR/USD-bullish contrarian trading bias.

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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