Talking Points:
- Fading liquidity with only two trading days left to the year dramatically alters market conditions
- A sharp drop from the Euro Wednesday may have been nudged by an Italian debt auction, but it originated with liquidity
- The drop from the S&P 500 this past session was the biggest in two months, yet expectations should be realistic
See how retail traders are positioning in the majors using the DailyFX SSI readings on the sentiment page.
The distortions from thin liquidity are growing more prominent. With only 48 hours left in this trading week, month, quarter and year; it will only grow more erratic. One of the most prominent movers over the past 24 hour session was the Euro. It seemed that the move was sourced from the Dollar or EUR/USD specifically; but the culprit can be traced back to the world's second most liquid currency. For the primary cross, the drop was intense but never seemed to truly threaten a revival of bear trend to fresh 14-year lows much less progress towards parity. Different people will point to different catalysts - like the Italian short-term debt auction that drew record low negative yields - but this move was more likely symptomatic of liquidity rather than any particular catalyst.
Broader in influence, but equally stunted by market conditions, was the slip from the S&P 500. Statistically-speaking, the more than 0.8 percent slide from the US index was the largest in over two months (October 11th to be specific). What's more, the move occurs just short of record highs and after a period of tight congestion that sets an appealing technical pattern. This may speak to general 'risk trends' but there wasn't a consistent sentiment drive across different asset classes to suggest fear was taking hold. If investor confidence were to collapse across assets and boarders, it could fight the dying light of liquidity; but it would still be a might struggle. A slide from the USD/JPY and Asian markets in the opening hours of Thursday will test bears' mettle.
Over the coming session, the docket is light for meaningful event risk. There are a few highlights such as US trade (amid a rising Dollar and trade barriers) and UK housing prices (in the face of Brexit), but neither carries serious weight even in normal trading conditions. One development that should not pass FX traders' attention was the news that the People's Bank of China (PBoC) deemed it necessary to dispel rumors that the onshore Yuan exchange rate (USD/CNY) had reached 7.0000. While this hadn't shown in the charts, making the announcement seems to legitimize the importance of the round number and speculators will be increasingly anxious as this pair climbs. We discuss the market swells and underlying conditions in today's Trading Video.
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