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- In this webinar, we tried to ‘look around the corner’ for what might be the most prominent themes as we head into 2017. Last year, we focused in on China, Oil and Rates; each of which saw significant volatility at some point in 2016.
- The first theme we focused on was Yen-weakness, as this has the prospect of significant-continuation. The Bank of Japan has received a veritable gift after the election of Donald Trump as President of the United States as the Yen has put-in massive Yen-weakness in the six weeks since. Should this theme continue, we could see Yen breaking below the lows set last year, just before risk aversion began to see ‘Abenomics’ come un-done.
- The second theme is U.S. equity valuations. Stocks in the States are currently exorbitantly expensive as the euphoria around the elections has driven prices to fresh all-time-highs without the supporting fundamentals. We discussed this theme in this morning’s Market Talk entitled Are U.S. Stocks Expensive? Yes.
At issue isn’t just an issue behind valuations; but one of drivers. We’ve had multiple ‘risk off’ events in U.S. stocks over the past few years, including the ‘Taper Tantrum’ of 2014, ‘China’s Black Monday’ in August of 2015 and again with the major risk aversion at the beginning of 2016. Each time that equity markets sold off, various Fed comments came-in to the market to bring life back to stocks. But now that the Fed is working towards normalization, do they have that same type of latitude to address risks in the first half of 2017? Probably not.
- The third theme we looked at was the possibility of Euro-strength. EUR/USD has had quite a bit thrown at it over the past two weeks with an extension of ECB QE and again with the Fed rate hike a week later. But even with all of these bearish-drivers in the pair, the widely-watched parity value still has yet to be hit. And while this may not necessarily be enough to substantiate a bullish-stance, the fact that the Euro has been unable to significantly break to new lows throughout the life of European QE; European QE that will be tapered after their initial program ends in March, and this could bring more up-side into the Euro-currency.
As we looked at, traders would likely want to voice such Euro-reversal themes against currencies other than the U.S. Dollar, such as the Aussie or the Japanese Yen.
--- Written by James Stanley, Analyst for DailyFX.com
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