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Thin liquidity and a rush to safety sees volatility kick start 2019

By Hamish Muress

So here we are in 2019!

It would be fantastic to kick start the year and not talk about Brexit or at least talk about how Brexit has been finalised, but alas. Despite it being a new year, some things don’t change. We are now just 85 days and not a lot of progress happened over the Christmas break with MPs away but Theresa May did take the opportunity on New Year’s Eve to urge Parliament to vote for her Brexit deal. This came off the back of reports that the Prime Minister did little over Christmas to win concessions from EU leaders. There isn’t much more for markets to think about at the moment, Brexit is entirely dictating terms. Things didn’t get any better for the pound yesterday either as it started the year with rotten form finishing the day as one of the market’s worst performing currencies. There were a number of reasons for yesterday’s moves but overall the largest driver was the concern about risk and the flood to ‘safe haven’ assets, in this case the US dollar.

Global markets started the year by reflecting on what happened in December and most notably the fact that there is a slowdown in Chinese manufacturing creating concerns over a global slowdown. Chinese manufacturing has taken a hit as the US-China trade war begins to bite. These concerns have only been exacerbated by Trump’s criticism of the Federal Reserve as well as the fact that the US government finds itself in a shutdown. As mentioned, yesterday saw a flight to ‘safe haven’ assets with the price on the reliable US 10-year treasury note rising.

Overnight as well, the USD tumbled against the Japanese Yen hitting a ten month low on the back of Apple cutting its Q1 revenue guidance. All moves over the last 24 hours have been exacerbated as well with a lot of markets and countries still away and on holiday. Indeed the moves seen in USDJPY are being described as a flash crash. Did someone mention limit orders?

The Euro followed the example of the pound yesterday, starting the day slightly on the front foot before suffering against the USD as concerns over a global slowdown were remembered. It’s a big year for the Euro area and Europe all in all. Obviously there is Brexit to talk about, but there are also European elections as well as a number of key European positions up for renewal, the head of the ECB being one of them.

Italy may have finalised a budget for 2019, however yesterday it was confirmed that in December manufacturing in the country contracted for the third month in a row. This is significant due to the fact that Italy is crucial within Europe for manufacturing, having the second largest base.

The Australian dollar yesterday faced the perfect storm when poor Aussie dollar outlook for the year met the resurging USD. Indeed AUD USD sunk to its lowest levels since the start of 2016. Australia is intrinsically invested in China, it being its largest trade partner, and so with the announcement and realisation that China could struggle in 2019, appetite for the Australian dollar is really falling.

2018 wasn’t a good year for the Canadian Dollar with the currency losing over 7% against its US dollar counterpart. The story at the back end of the year was certainly the sell off in oil prices which hampered the loonie but the slight uptick in prices yesterday did ensure that USDCAD held below 1.3660.

The story of the Kiwi was the same as that of the Australian dollar with concerns of growth from China hammering the New Zealand dollar. The Kiwi slipped to its lowest levels against the US dollar since November, not a great start to the year.