Currency overview.

Here is my current view of each individual currency:

USD: By the 3rd quarter of 2024 it became apparent pricing for future FED rate cuts was over zealous due to the strong US economy and sticky inflation. That narrative remains with the added presence of the incoming Trump administrations 'tarrif threats', which for now, is seen as USD positive. At some point it is 'likely' the FED will take a dovish turn, but in the meantime, my view is that the USD is currently the 'only long in town'. And I'll be keeping an eye on the 'US 10year' and the 'FED funds predictor' for clarification.

GBP: The pound had an extremely resilient 2024, mainly due to the reasonably hawkish BOE and (in the main) resilient data. Although the BOE remains one of the most hawkish central banks, there are growing concerns of government policies threatening economic growth. And the GBP has started the new year with sour sentiment.

AUD: The Aussie's lackluster price action during a lot of 2024 was a particular bug bear of mine. The RBA remained steadfastly hawkish throughout (and still hasn't cut interest rates). Which 'should' have ensured the AUD was one of the stronger currencies. But a combination of China growth concerns and the unwinding of the JPY 'carry trade' meant the AUD didn't have the strength it fundamentally deserved. The AUD has also begun the year with negative sentiment, due to data slowly softening, which has led to thoughts the RBA could be about to turn more dovish.

JPY: Arguably, the single biggest difficulty for forex traders throughout 2024 was the BOJ. Historically JPY short is the 'go to trade' thanks to interest rate differential plus the 'negative correlation' with a risk on environment. But the interest rate differential between the YEN and other currencies grew so quickly, the JPY weakened too much for the BOJ to tolerate. Which forced interest rates to leave negative territory and actually go above zero (only marginally it should be said). The threat of more interest rates hikes and intervention, actual and verbal, has caused the 'unwinding' of the JPY carry trade. Institutions are reluctant to place large short JPY trades while the 'will they, won't they' circus continues. At some point, the BOJ will announce peak rates and trading 'should' become a little more straightforward. In the meantime, there are occasions the JPY is shortable, it's just a case of accepting the 'intervention volatility' risk.

EUR: It's widely touted EUR USD is currently on a slow grind to parity. As a 'fairly dovish' ECB, Eurozone growth concerns and political uncertainty weigh on the EUR.

NZD: Similar to the AUD, the NZD had been bogged down by China concerns and the carry trade unwind. Data has softened, the RBNZ did turn dovish and have cut rates. Central bank talk has been quiet of late and we await up to date RBNZ thoughts.

CHF: The SNB is currently the most dovish central bank. Having already cut rates multiple times and with recent data showing disinflation is ongoing, there are likely more cuts to come. A return to negative rates isn't out of the question and the CHF 'should' remain a good currency to short.

CAD: A slowing economy with concerns about the housing market has ensured the BOC have already cut multiple times. And whilst the speed of rate cuts may slow down, the BOC remains dovish and the CAD remains on my 'to short list'. As ever, the difficulty trading the CAD comes from the correlation with oil and proximity to the US (If the USD is strong the CAD will likely be stronger than other currencies).

*There will still be times the market is 'clearly risk on'. And the JPY and CHF will be shortable Vs any of the other currencies despite individual fundamentals or sentiment.

Conversely, (hopefully not) but there could be times a 'risk off event' lends itself to a JPY or CHF long, despite fundamentals and interest rate differentials.

Friday brings NFP data. And a positive result with lower unemployment and higher wage growth could compound USD strength and create an 'in the moment' news trade. But, as ever, strange Friday trading and NFP whipsaw will be a risk. And there is no harm in sitting on the sidelines until Monday.

Feel free to email any questions: johnelfedforexblog@gmail.com