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FX Market Insight: Flurries in December – Five events that matter

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This December, we may see more stormy weather coming to the financial markets. Here are five events which have the potential to create even more turbulence than we've experienced so far this year:

December 1: Trump / Xi dinner at the G20 summit

President Trump and China’s Xi Jinping met over dinner Saturday evening December 1 in Buenos Aires at the G20 meeting. The eyes of the world were on this meeting and the leaders of the world's two largest economies as the trade war between the US and China continues. Immediately before the meeting, Trump’s top economic advisor Larry Kudlow commented, “This is a big deal, this meeting, the stakes are very high.”

Ongoing market reaction: Odds had favored some sort of agreement in which both parties could claim victory, and they did not disappoint: a trade war truce for 90 days was agreed to. On the next business day, December 3, both the US and Chinese equity markets rallied by nearly 2 percent. However, on December 4-10 US equities fell approx. 9 percent, partially due to confusion with details of the trade deal. The USDCNY rate reached 6.85 despite the trade concerns.

 

December 6: OPEC meeting

Oil prices have dropped 30 percent in the last two months, the sharpest decline in years. The Organization of Petroleum Exporting Countries (OPEC) held its second and final meeting of the year. Representatives from the 15 OPEC countries discussed how best to manage output in a market characterized by oversupply and reduced demand.

Market reaction: An agreement was reached to cut oil production more than expected, causing an immediate 4 percent jump in oil prices. Commodity currencies quickly rallied, and the JPY and INR sold off as expected.

 

December 11: BREXIT / UK Parliament vote

On December 11, the UK parliament will vote on a BREXIT deal, which will decide the future of the UK’s departure from the EU, officially set to take place on March 29, 2019.

Potential market reaction: Odds favor a deal revised by Parliament, which could result in another BREXIT referendum vote. Whatever the outcome, investors may welcome a resolution of any kind, and will likely bid up UK and EU equities, the EUR and GBP.

 

December 13: European Central Bank (ECB) meeting

There will be no interest rate hike; the -0.40 benchmark rate, which has been in place since March 2016, will remain in place until sometime later next year. The markets expect that ECB President Draghi will announce the formal phase out of quantitative easing, despite the recent slowdown in eurozone growth.

Potential market reaction: The ECB has been telegraphing its decisions well in advance, so there should be little reaction in financial markets.

 

December 19: Fed’s FOMC meeting

The US Federal Reserve is likely set to hike rates another 25 basis points to 2.25-2.50 percent. The official FOMC statement, the “dot plot” and comments by Fed Chairman Powell will all be scrutinized to see what predictions the market can make for upcoming rate adjustments. Will the Fed hike three more times in 2019 and once in 2020, lifting the final target to 3.25-3.50 percent? Or will there be a pullback in expectations?

Potential market reaction: Fed members, including Powell, have recently signaled that they may adopt a more flexible approach in their gradual interest rate increases. If they do so, it will likely reap rewards for US equity buyers and short sellers of US dollars in the FX markets.

Please contact your FX Advisor for analysis particular to your situation, or email SVB's FX team at fxadvisors@svb.com

 

Further reading

For the full review of what moved markets in November and the look forward, read FX Monthly Outlook December 2018.


Sources: Bloomberg 2018

©2018 SVB Financial Group. All rights reserved. Silicon Valley Bank is a member of the Federal Reserve System. Silicon Valley Bank is the California bank subsidiary of SVB Financial Group (Nasdaq: SIVB). SVB, SVB FINANCIAL GROUP, SILICON VALLEY BANK, MAKE NEXT HAPPEN NOW and the chevron device are trademarks of SVB Financial Group, used under license.

This article is intended for US audiences only.

The views expressed in this article are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates. This material, including without limitation the statistical information herein, is provided for informational purposes only. The material is based in part upon information from third-party sources that we believe to be reliable, but which has not been independently verified by us and, as such, we do not represent that the information is accurate or complete. The information should not be viewed as tax, investment, legal or other advice nor is it to be relied on in making an investment or other decisions. You should obtain relevant and specific professional advice before making any investment decision. Nothing relating to the material should be construed as a solicitation or offer, or recommendation, to acquire or dispose of any investment or to engage in any other transaction.

About the Author

Scott Petruska is Chief Currency Strategist and senior advisor for Silicon Valley Bank’s global financial services group, and is based in Boston, MA. He advises clients on currency and interest rate hedging strategies, and helps them with other aspects of global banking. He regularly writes blogs on topics covering the global financial markets, conducts client seminars and webinars, and speaks at regional financial conferences.

Petruska has more than 30 years experience in the currency and interest rate markets, and has lived and worked in Boston, Chicago, New York City, Singapore and Tokyo. Prior to joining SVB in 2009, he worked at several large international financial institutions, including National Westminster Bank, Irving Trust, Bank of New York, State Street Bank and Commerce Bank. He has been an institutional trader, product developer, analyst, salesperson and advisor.

Petruska has been awarded several professional designations, including the CFA (Chartered Financial Analyst), FRM (Financial Risk Manager) and CMT (Certified Market Technician). He earned his undergraduate degree in Finance & Banking from the University of Wisconsin.

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