Feds lean towards market expectations.

On Friday, Dec. 8, 2023, we had a solid U.S. Jobless claims data come out with Initial Claims beating expectations at 220k vs 222k expected and Continuing Claims coming at 1.861m vs expected 1.91m, a significant 50k drop. Significant because continuing claims was the aspect in the jobs claims data which has had a strong climb for 9 consecutive weeks. This could be a misleading signal like we had in 2022 and the early part of 2023, where we had a similar up trend in the data which gave investors the false narrative that the U.S. economy was finally slowing down. This was then followed by a slowdown in the data and inflation ticking back up again. 

This could possibly be the scenario we have in our view again. If this is the case, we can start to believe there may not be a “soft landing” as is the current sentiment for the U.S. We are for sure witnessing a softening in the labor market and inflation rapidly deteriorating back down towards the 2 percent target. 

Wednesday 13^th Dec, the Federal Reserve held their FOMC meeting where they once again held rates. In previous meetings this cycle, the Fed did well to push back against market expectations of an early rate cut, however for the first time the Fed gave in and capitulated and for the first time was in line with market expectations of more rate cuts being needed in 2024, a very dovish stance, this was felt heavily throughout the FX market as rates were seen as being significantly below expectations for the dot plot metrics, causing the dollar to fall and most risk assets rising quite significantly.

The Horizon Team is on the side of inflation definitely is falling rapidly and we are well beyond peak or where rate hikes are necessary in the economic cycle. So yes, the global economy is slowing down. We aim to profit by selling the economies that are slowing down the fastest and further and buying the economies that are slowing at a slower pace either because they are still struggling with inflation, or simply because their economies are strong and stable. 

How can we make an educated prediction on who will slow down the most and the fastest?       

Well, if we are focused on FX, we want to focus mainly on inflation data, being that it’s the number one priority for Central Banks at this current stage in the cycle. Employment data would be a close second as it’s feeding in some aspect into the inflation data nonetheless resilient. 

The RBA and RBNZ remain the only two Central Banks with a somewhat hawkish sentiment due to inflation still being quite elevated in the two countries. This will change and the economy WILL for sure slow down, and possibly quite fast, it is just delayed and thus makes them a good contender for the medium-term buys against already recessionary currencies like the Euro and the Pound.

Long term, however, we may want to start averaging into AUDJPY SHORTS, and NZDJPY SHORTS as both the RBA and RBNZ WILL eventually switch their outlook and begin cutting rates causing investors to then run to a safe haven in Asia which will be the YEN. As an extra, we can also short both AUD and NZD against CHF as the rate spread will start to tighten between the regions.

Positions the Horizon Team is monitoring: 

SHORT: EURNZD, EURAUD, GBPAUD, GBPNZD, AUDJPY, NZDJPY, GBPJPY, CADJPY, EURJPY, GBPCHF, EURCHF, AUDCHF, NZDCHF,