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Canadian Dollar Soars, Euro Sinks. Will 2020 See Fortunes Reverse?

Canadian Dollar Soars, Euro Sinks. Will 2020 See Fortunes Reverse?

2020-01-02 08:00:00
David Cottle, Analyst
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2019 Best and Worst Performing Major Currencies - Talking Points:

  • The Canadian Dollar looks set to win 2019’s currency battle
  • Barring unlikely last-minute reprieve, the Euro will lose it
  • The New Year may well see some league table shifts, but they may have to wait a while
EUR/USD BEARISH
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Change in Longs Shorts OI
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Weekly 12% -20% 0%
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Canadian Dollar bulls look set for the biggest New Year’s Eve celebrations this year, with fans of the Euro likely to mark the end of 2019 in more muted fashion.

The Loonie has been the standout performer among major traded currencies this year, gaining nearly 4% against the Dollar to date. The single currency has fared much worse, losing 3.10% against the greenback.

Is this ranking likely to change in the New Year? Well, not obviously at least in the short term. The Canadian Dollar has been buoyed up by steadily rising oil prices and by some relative economic strength. These have seen it offer more tempting interest rates than most. Yes, the latest Canadian growth data were soft, vigilance is warranted. But the Canadian Dollar’s various supports aren’t going to vanish with the last snows of 2020.

Chart of major currencies' performance vs the US Dollar in 2019

Chart from finviz.com

Keep a close eye on oil prices though. The market anticipates stronger demand ahead, and reduced supply. That ought to be good for the currency but thee hopes have been dashed before.

Euro Struggles on Many Fronts

The Euro meanwhile is already beset by weaker economic data, worries about its trading relationships with both China and the US and, of course the European Union’s loss of its second largest economy and major source of funding now it has become clear that the UK will be leaving. New European Central Bank President Christine Lagarde is no hawk and monetary policy support for the currency is likely to remain scant.

Of the other widely-traded majors it is perhaps notable that the Australian and New Zealand Dollars have underperformed this year, even as their Canadian commodity-linked fellow has done much better.

Of course the Asia Pacific units offer much lower interest rates than Canada now, which will account for some of their general weakness. They’ve also been hammered at intervals through the year as US-China trade talks have stalled. Australia and New Zealand have huge interests in peace between the world’s two economic superpowers. A phase one trade truce will be nice, but it’s not the overarching settlement both countries would love to see. That may come of course, but it won’t come soon.

Could their currencies’ fortunes change in 2020? Well, it is just possible that the markets have become a little too bearish on both. With interest rates at record lows and consumer debt a major worry , at least in Australia, the bar to the sort of continued monetary easing the market is looking for may be higher than investors think. However, both the Aussie and Kiwi dollars are likely to remain yoked to the trade story overall. That has cost them this year and may continue to do so.

Sterling Perks Up But Remains For the Brave

That leaves us with the British Pound and the Japanese Yen. Sterling has risen about 1.5% against the Dollar this year. The election of a clear, pro-Brexit majority in London has cleared some of the fog over this vexed issue. The next stage is a durable post-Brexit trade settlement with both sides now talking tough. Sterling is perhaps underpinned by a clear political majority but 2020 bulls will have to be brave beasts.

In a world of so many economic uncertainties, the Japanese Yen will probably retain its essential haven bid. However, there is little sign yet of any letup in its ultra-loose domestic monetary policy and it’s hard to see the currency keeping much traction if risk appetite can hold up.

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--- Written by David Cottle, DailyFX Research

Follow David on Twitter @DavidCottleFX or use the Comments section below to get in touch!

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