Justin Pugsley - Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Justin Pugsley
Justin has over 20 years experience writing about markets, economics and finance. He has worked for a number of leading media organisations such as Agence France Presse (AFP), Dow Jones, Wall Street Journal, Thomson-Reuters, British Sky Broadcasting and McGrawHill.
Profile

Is this the beginning of the great convergence trade?

Last week’s statement from the US Federal Reserve was dovish. Not only did it not raise interest rates, but was hardly brimming with enthusiasm over US economic prospects. As such Forex markets could be starting to position for global economic convergence.

A big theme in the markets for the last year or so has been the great divergence. While the US economy grew healthily, the Eurozone and Japan struggled. The respective adjustments in monetary policy saw the USD soar whilst EUR and JPY fell.

Now there’s a real risk of convergence, namely the US could face a slowdown next year as a large number of countries around the world are struggling to ignite sustainable growth.

Is this the beginning of the great convergence trade?

The US Federal Reserve also flagged concerns over emerging market countries and wobbly financial markets. Many emerging market countries are suffering slowdowns or outright recession from China, Russia to Brazil and it could take a while for those economies to turn around.

The US Federal Reserve also flagged concerns over emerging market countries and wobbly financial markets. Many emerging market countries are suffering slowdowns or outright recession from China, Russia to Brazil and it could take a while for those economies to turn around.

That matters because, according to the World Bank, emerging market countries account for 57% of the global economy and at the same time the US share has been shrinking steadily. According to some estimates it now makes up 23% of global output from 40% in 1960.

That could see the much anticipated rate rise delayed indefinitely. Indeed, speculation could even turn to the timing of the next round of Fed quantitative easing. That would be a game changer for the markets.

Under such a scenario the USD would give back all its recent gains and more, which were driven by the perception that US monetary policy was turning. The USD index peaked at just over 100 in March this year and is now around 95, but could sink all the way back to 80-85s – levels seen during H1, 2014. (That’s providing this doesn’t lead to blind panic in the markets, in which case USD would become a last resort currency while JPY would play its traditional role as a safe haven).

That would push up the values of many other currencies, such as EUR, JPY and GBP among others. It was also bring back talk of currency wars, as a strong USD was very convenient for many countries as it diminished US competitiveness in export markets.

However, the prospects of this scenario playing out are still in the realm of probabilities. For the time being, the US economy is growing steadily, its big companies remain profitable and its banks are in good shape. Hopefully, the US will continue on that path, but it isn’t immune to brewing troubles elsewhere in the global economy, if they escalate, and that’s the message, which came out of the Fed last week. No wonder equity markets have been selling off.

If so the big theme next year could be the great convergence.

 

TECHNICAL ANALYSIS – EUR/USD up-trend losing momentum

 

To some extent the technical on EUR/USD are mirroring a potential convergence between the GDP growth and monetary policy prospects for the US and Eurozone. Since March 2015, EUR/USD has bounced off a low of 1.04626 and in August 2015 reached a high of 1.1715. Admittedly, a lot of those gains have been given back, not least because the ECB has threatened to be more aggressive with its quantitative easing programme and wants to keep the EUR weak.

Though losing momentum, the long-term trend still remains upwards. Support can be seen around 1.1124, 1.1089 and 1.1022. Resistance can be found at about 1.1317, 1.1433 and 1.1450.

The daily RSI is neutral at 47 and the slow stochastics indicator has generated a sell signal and EUR/USD has pierced the mid-Bollinger band and looks likely to reach the bottom one. Over the short-term more downside seems likely for the pair. A breach of support at 1.1089 could see EUR/USD go on to ratchet up some big losses.

 

By Justin Pugsley, Markets Analyst MahiFX

comments powered by Disqus

Trader Stories

Latest Interviews

Statement on CHF market volatility

Business as usual for MahiFX despite Swiss franc movement

Full Interview

MahiFX does not provide investment advice or recommendations, and no material on this site should be construed as such. Opinions are those of the authors and not necessarily those of MahiFX, its officers or directors. MahiFX’s Terms of Use and Privacy Policy apply. Leveraged trading is high risk and not suitable for all. You could lose some or all of your deposited funds.