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Three Surprises to Watch for in Q1, 2017

Three Surprises to Watch for in Q1, 2017

James Stanley, Senior Strategist

Talking Points:

- In this webinar, we took a ‘big picture’ view in the attempt of looking ‘around-the-corner’ for what the next major market themes or drivers might be.

- We started off by looking at the Euro, which has been surprisingly resilient after the ECB’s QE announcement in December. A week after that announcement, the Fed hiked rates while getting more-hawkish for 2017 and 2018; and the net result was an approximate ~100-pip break of support followed by higher-prices. Longer-term, the Euro still may be oversold from the 2014 move that led into 2015. This is the first ‘surprise’ that we covered.

- Looking for Euro strength against a U.S. Dollar that’s expected to be driven-higher by a more hawkish Fed may not be the most attractive way to go about that. Instead, we looked at the possibility of trading Euro strength against the Australian Dollars and/or against the Yen. If you’d like to read more about the EUR/AUD setup, I identified this as my ‘trade of the year’ for 2017, and this is part of the DailyFX Trading Guides which are completely free of charge and available from this link.

- We then moved on to the big question: “Is the Trump Trade Done?’ We instead re-positioned the argument by looking at shifts in the backdrop that led-in to the move in the first place. The reversal around the election was driven by the combo of implied passive monetary policy from the Fed should trouble begin to show and the hopes of fiscal stimulus. That implied dovish monetary backdrop has shifted after the Fed’s December meeting, and fiscal stimulus is likely going to take some time to show up.

So it would appear that we’re nearing a vacuum that may have a dearth of top-side drivers for stock prices. But this still isn’t a bearish thesis, as a ‘outsized’ move larger may need an ignition.

- We then looked at China as a potential ignition. USD/CNH has been wildly volatile so far in the year, with the PBOC making strong moves in their daily fix. The big question is why? It would appear that they’re attempting to stem capital flows by fixing the Yuan stronger, but what’s driving that? Given that China is still an opaque economy, investors will likely want to remain cautious while price action is putting in such wild and volatile moves in the Yuan.

--- Written by James Stanley, Strategist for DailyFX.com

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