The end of last year and the beginning of the current one was marked by the expectation of a new trade agreement between the US and China. Negotiations began on Monday this week and after two days have not yet yielded the desired result. Previously it was planned that they would pass during these two days, but during this time no agreement was reached, which made markets worry, although it did not have a negative impact on them.
If today again there will be no result, and only positive expectations that were previously present will be available, then we can expect a drop in optimism in the markets and the resumption of sales of risky assets. This is due to the fact that investors now have few phrases from President D. Trump from Twitter that the discussion of the negotiation process "is going very well." Previously, he repeatedly scattered optimism, which in fact turned out to be a pacifier.
Since so far there is some uncertainty in the negotiations between the States and America, all market attention is still focused on expectations that the Fed may stop the interest rate increase cycle this year and, importantly, stop the process of reducing its balance sheet. A number of statements by some members of the Federal Reserve immediately after the New Year that it would be nice to suspend the continuation of the normalization of monetary policy, as well as the statement of the head of the US Central Bank about "quickly and flexibly" adjusting the policy if necessary, became the basis that led to a strong the growth of the US stock market immediately after the "Catholic" Christmas, which was also the basis for the recovery of demand for risky assets in the world.
On this wave, the US dollar remains under pressure, as the prospects for halting the increase in interest rates, as well as the overall demand for risky assets, put pressure on it. This primarily relates to the commodity group currencies, as well as the currencies of countries with developing economies (EM). On this wave in recent days there has been a strong increase in the exchange rate of the ruble and the Canadian dollar, which also receive support due to the upturn in crude oil prices, which in turn is supported by the OPEC + decision to reduce crude oil production to stimulate black gold prices.
In general, assessing the market picture, we can say that while the markets live with hopes that an agreement between Washington and Beijing will still be reached, the Fed will suspend the process of raising interest rates and reducing the balance, and the tragedy of Brexit will not be monstrous. But are these expectations real? We have doubts about this, so we are not so optimistic in our forecasts for the first quarter of the new year and continue to adhere to our scenario of the likely development of events, which was set out in the yesterday's review.
Forecast of the day:
The EUR / USD currency pair is trading in the range of 1.1350-1.1475. If the protocol of the December meeting of the Fed published today shows an increase in the probability of a pause in raising interest rates, the dollar will be under pressure and the pair may break out of range and rush to 1.1530.
The USD / CAD currency pair is trading below 1.3265 in anticipation of the outcome of the Canadian Central Bank meeting on monetary policy. For the time being, it is not supposed that the rates will be raised, but if this happens or the bank will make it clear at the end of the meeting that we should expect an increase in rates in the near future, the pair may continue to fall to 1.3160.
