EURUSD, GBPUSD and S&P 500 Talking Points:
- The coming week is the last full week of trade this year before Christmas and New Years dampens liquidity until 2021
- With benchmarks for sentiment pushing records and participants leaning far out on the speculative limb, the potential for tangible trend should be weighed
- Meanwhile, relative volatility could be charged by vaccine news, stimulus headlines, developed world December PMIs and a string of central bank meetings led by the Fed
The Last Full Trading Week of the Year
Though there are technically three weeks left to 2020, the forthcoming week is the last that will carry full liquidity. That is important to account for if you are a trader as market conditions will be significantly influenced by the depth of the trading rank. While there are key issues such as vaccine approvals and Brexit decisions as well as scheduled event risk including the Fed rate decision and developed world December PMIs; the impact these will have will likely distort such that volatility will struggle to turn into viable trends. This cap on intent will make for a particular unsettled situation for risk trends. With the S&P 500 – representing broader speculative appetite – in a holding pattern near record highs, an extraordinary imbalance of risk-reward could hold a spell over markets until the new year is well underway.
Chart of Nasdaq to S&P 500 Ratio Overlaid with the S&P 500 (Daily)
Chart Created on Tradingview Platform
Looking into the remainder of the month and year, there is an undercurrent of assumption that seasonal influences will kick in and keep risk trends steady if not advancing. Historically, the month of December does average out climb for the S&P 500 as volume and volatility settle. Yet, I have been in these markets long enough to have seen deviations from that norm (such as the 9 percent drop to end 2018 amid trade wars). It is also important to separate the potential for just the coming week from the overview of the next three weeks. There is plenty of event risk expected or scheduled which could readily encourage volatility even if trends are difficult to muster.
Chart of S&P 500 and VIX Seasonal Performance by Month Back to 1980
Chart Created by John Kicklighter with Data from Bloomberg Terminal
Yet, as we evaluate day-to-day, week-to-week and over longer periods; I believe it is important to appreciate the skew in market participant and what it means for ‘market conditions’. Beyond the record highs the S&P 500 and other measures are pushing, the ‘devil may care’ attitude from the smaller players and less experienced market participants seems to be exerting a greater influence over the entire system. With larger participants concerned over the value of further exposure but content to hold fast – particularly at this time of the year – we may see more speculative activity. Interest and exposure in day trading and options trading matches the rise of retail darlings like Tesla and last week’s Airbnb IPO.
Chart of Global Google Search Activity for Cryptocurrency, Options and Day Trading (Weekly)
Chart Created on trends.Google.com/trends
Comprehensive Risk Trends Versus Relative Potential
With proper appreciation for the environmental and seasonal distortions, it is important to next acknowledge the high profile event risk on tap. Even events like the FOMC rate decision will likely struggle to fuel trends, but they can absolutely generate volatility – especially when it stokes relative consideration as with exchange rates. On monetary policy, the ECB upped the ante this past week with another 500 billion in euros for stimulus. The Fed is not expected to meet that effort. Nor are the Bank of England, Bank of Japan and Swiss National Bank. That could weigh in on volatility for EURUSD an EURJPY among other pairs?
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Chart of Major Central Bank Stimulus (Monthly)
Chart Created by John Kicklighter
Another theme that can generate relative volatility is economic activity. While Wednesday will be considered ‘Fed day’, it will also offer up the flash December PMIs for the major developed economies. It is of course important to see how these important economies are doing collectively, but further divergences in performance can open up greater volatility for exchange rates in response to the data release as well as further down the line with further updates.
Chart of Major Economy PMI Readings as Growth Proxies (Monthly)
Chart Created by John Kicklighter with Data from Bloomberg Terminal
Top Volatility (and Liquidity) Options this Week: EURUSD and GBPUSD
Considering the docket items and a concentrated appetite for liquidity in these fading weeks of the year, I will be looking to the Dollar-based majors as particularly capable of exhibiting volatility. The news of the FDA approving Pfizer’s Covid-19 vaccine in the United States could exert some pressure in the Greenback’s bearings similar to how the lack of fiscal stimulus these past months has held impact. Aside from Monday’s open, Wednesday afternoon in the New York session will be a key event time between the US PMI and Fed decision (with forecasts). While there are well worn bear trend in the Dollar that could be pressed, follow through will be difficult to maintain. The same is true of reversals if they arise, but that is likely to stretch further as it will be covering range rather than forging new ground. There is interesting layout for the likes of AUDUSD, USDCAD and other pairs, but EURUSD is the most interesting to me.
| Change in | Longs | Shorts | OI |
| Daily | 0% | 11% | 3% |
| Weekly | -3% | -5% | -3% |
Chart of the EURUSD with 100 day Moving Average (Daily)
Chart Created on Tradingview Platform
If there is a major that will not simply go along with what the Fed and other US influences encourage for the Dollar, it would be GBPUSD. Just as the news of renewed lockdowns and a vaccine approval were overridden for market influence by Brexit headline anticipation, we are rolling into yet another deadline. This time, the key date is Sunday whereby Prime Minister Boris Johnson and EC President Ursula von der Leyen agreed was a critical deadline for practical implementation of trade preparations for January 1st. Depending on how this falls, the Sterling may prove the most fundamentally-driven major currency this week.
| Change in | Longs | Shorts | OI |
| Daily | 1% | -2% | 0% |
| Weekly | -2% | -14% | -5% |
Chart of the GBPUSD with Net Speculative Futures Positioning and Daily Wicks (Daily)
Chart Created on Tradingview Platform
And, finally, as we await the word on whether the EU and UK will maintain a healthy trade relationship or not, it is worth keeping in mind what level of discount is already accounted for from GBPUSD and other crosses. My poll shows may expect a significant further slide from the Cable should talks hit the skids, but we have had four years to harden to this reality of likely hard cut off.
Twitter Poll on How Far GBPUSD May Drop with Further Brexit Talks Breakdown
Poll from Twitter.com, @JohnKicklighter
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