Out with the old and in with the New

So, as the final trading day of the year gets underway many market participants are probably glad to see the back of 2018. Certainly, the performance by many of the hedge funds this past year would underscore that thought.

Not many analysts have called the direction of currency markets right this year either. The rebound in the dollar from the start of the second quarter saw to that. I don’t remember anyone back then calling for the EURUSD to end the year underneath 1.15 that’s for sure.

The global growth outlook and optimism of earlier in the year that saw equity markets reach multi-year and record highs has faded in recent weeks with many of world’s major indices now falling into ‘bear market’ territory.

This has been accompanied by a string of calls for a more pessimistic growth outlook in 2019.

The view that I expressed in my October 8th article; that it was time to head for the exit in those markets has so far proven correct. The question now is whether or not that was just a correction to the previous trend or the end of an era? Well, my thoughts right now would favour the latter and I personally remain un-invested until I see clearer evidence to make me change my mind on that.

For much of 2018 it was Brexit that hogged the headlines and surely that will be the case again in 2019, certainly for the first quarter at any rate. I said last week that I would have a good look at the ‘tea leaves’ and see what that might revealfor the currency going forward.

So here goes. Like many others I have been trying to fathom all the potential Brexit outcome scenarios and all I can say is; given the current impasse, I can see only two possible conclusions on this now- a no deal exit or simply no exit at all. Whilst that’s hardly an earth shattering conclusion I suppose, it is nonetheless where I am with it all at the moment and incidentally, a prognosis that’s remarkably unchanged from my Berlin broadcast of two years ago.

So, on the face of that, if correct it would deliver a rather binary prognosis for the pound- down on one outcome and upon the other. In reality though, I am sure it won’t be anything like as straight forward as that.

I also wrote here some weeks back (Oct 26th) about the long term technical outlook for the currency. Right now, and from a fundamental perspective, I see little reason to change that outlook. However, I also noted in that article that it wasn’t just Brexit that ultimately might send the pound sharply lower.

In conclusion to this then, and after much contemplation, I think it’s increasingly likely we will leave the EU on March 29th with no transition deal in place. Consequently, the pound will fall. Furthermore, and as previously stated, I think such an outcome could easily open the door to a Labour government- that would most certainly be a case of ‘out with the old and in with the new’ wouldn’t it? More importantly, a potential combination of those two political outcomes would surely be the most toxic for the currency.

Now of course things may not pan out in such a way, and meanwhile the pound has recovered its most recent drop against the dollar from below 1.25 to back above 1.27 as I write this morning. However, I think the markets are still not all convinced by any stretch; that the UK will end up remaining in the EU because if that were the case, then the price would already be considerably higher than it currently is.

Irrespective of that, what is certain is that the pound is going to continue to be highly volatile over the coming two weeks ahead of the ‘meaningful vote’ on or before 14th January.

Turning briefly now to what may or may not play out later today for the final set of month end fixings of 2018. As I noted last week, the talk is still for general dollar demand coming into the year’s close due largely to the Fed continuing to shrink its balance sheet. Looking beyond this though, and into next year, I note a high number of calls for the dollar to weaken in 2019. Well, that might be the case, but I would just note; several of those calls are from the same suspects who also argued for that in 2018, so make of it what you will!

Meantime, it just remains for me to wish you all a happy, healthy and hopefully prosperous New Year.