Year End FX Sell-Off? Not Yet.

We feared that there would be year-end profit-taking in currencies this week as the virus mutation and lack of Brexit progress haunts the markets. But so far, we haven’t seen any evidence of those risks turning into fear. Stocks resumed their rise and currencies followed suit. A large part of that has to do with medical experts assuring the general public that there’s no reason to believe the vaccine won’t work on the new strain which doesn’t appear to be more deadly. However the US stimulus package still hasn’t been passed – President Trump vetoed the agreement, demanding bigger checks for Americans. The House responded quickly with plans to bring up to the floor legislation that would provide $2,000 direct payments, a number Republicans vehemently oppose. It's not clear how this will resolve but the longer this dance drags out, the greater the risk of a sell-off in stocks next week.

10 and one 10 us dollar bill

Image Source: Unsplash

Stocks do not always sell-off the last two weeks of the year. In fact, in the last 15 years, it only dropped 9, and when they declined the sell-off typically began after Christmas. This means there’s still a chance of a year-end sell-off especially after the big runs in currencies and equities this year. With that said, the post-COVID-19 recovery should be very strong so even if there is a sell-off it may be limited.

The US dollar extended its slide against all of the major currencies on Wednesday on the back of mostly weaker data. Although jobless claims rose less than expected, it's still running well above 800K. Durable goods orders growth slowed, personal income and spending declined and new home sales fell sharply in the month of November. The University of Michigan consumer sentiment index was also revised lower.

Sterling was the best performing currency on Wednesday. The Brexit deadline is quickly approaching but investors remain hopeful. Tonight is the night, with a Brexit deal expected within hours. If an agreement is finally reached after years of negotiation, we will not only see a sharp rally in GBP but broad-based gains in risk currencies. GBP/USD could spike to 1.40 easily with EUR/GBP sinking below 85 cents. If no deal is made, the reaction in GBP depends on whether the talks continue. If they do, the move will be cautious but if both sides call it quits, we could easily see a 3 to 5 percent drop in the currency.

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