Hawk’s turn Dove’s

November 30th, 2023, we saw some EU data finally hitting back causing the EUR to take a hit.

The recent hawkish tone from the ECB is going to fade as the fed’s hawkish tone has faded. Waller was first to speak about rate cuts a couple days ago with other members of the Fed following, then Fed member Mester hitting back yesterday with a slightly less dovish tone which was likely an attempt to keep extended moves in the bond and equity markets in check.

Let’s stay vigilant in anticipation of the first ECB doves to voice their opinions.

Economic data was already deteriorating in Europe for quite some time now, predominantly in Germany and the rest of middle Europe, but now we are seeing inflation data drop as well. With that said, we can expect employment to deteriorate as well anytime soon as German car manufacturers already made announcements about slashing a couple thousand workers each, and other big manufacturing industries are having to slash as well. Service is going to lag, as always, but is going to have to slash workforce on a massive scale as well anytime soon.

Where can we profit from this forecast?

Well, we can profit by trading the rate spread tightening between the currencies that are pricing in rate cuts and the safe havens JPY, CHF, and possibly the Dollar. The Yen and Swiss franc are usually stable in terms of interest rates, giving them a strong status as safe havens when there is turmoil in the global economy.

This week we saw both JPY and CHF gaining strength, with CHF leading the race so far with JPY still facing the usual problems. 

Potential Trades:                   

CADJPY short should still stand as long-term trade to position into as well as CADCHF. EURJPY / EURCHF shorts should come in strong now, GBPJPY / GBPCHF as well.

BOE’s Bailey spoke about the UK being in the worst economic position since the start of his career and that being a “realistic rather than pessimistic view” is something we can take into consideration as well.

As of right now, the RBA and RBNZ are most hawkish in some aspect – or better said the only ones that face the biggest challenges regarding inflation. That being the case, we can favor EURNZD shorts, as well as EURAUD shorts.