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Monday January 24, 2022 - 11:44:21 GMT
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When Will the New Year Forex Chop End?

After largely ignoring the prospects of rising interest rates and reduced central bank stimulus (e.g. Fed ending QE and eventually reducing its balance sheet), markets seemed to have awakened to the reality of the monetary punch bowl being drained.


This has resulted in a double whammy as stocks slide and bonds tumble (yields rise) as the reality sets in. The forex market, by comparison, has been mixed and choppy, with limited follow through. This can be seen by the following table where only USDJPY was trading more than 1% from its 2021 close:;

                                                            Closing rates

 

12/31/2021

1/21/2022

% change

EURUSD

1.1368

1.1343

-0.2

GBPUSD

1.3529

1.3554

+0.2

USDJPY

115.08

113.67

-1,2

USDCHF

.9122

..9120

0.0

USDCAD

1.2634

1.2580

-0.4

AUDUSD

.7223

.7177

-0.6

With the Fed shifting to a less accommodative monetary policy stance to contain rising inflation. logic would typically see the dollar benefit from the shift. However, this has so far not been the case as the forex market has struggled to find a safe place to hide in this period of global market stress.

Several reasons could be given to explain this situation:

1) Repatriations back home as foreigners unwind stock and bond positions.

 
2) Low-yielding currencies benefit from unwinding of carry trade positions (e.g. JPY).


3) Bond yields rise across the globe as expectations are that Fed tightening gives cover to other central banks to do the same so the US is not the only game in town

4) In times of market stress, the dollar often finds some support from safe haven flows

In my article Trader Alert: Beware of New Year Whipsaws and False Starts, I warned to be on guard against false starts and whipsaws that often occur in the first week of the year. Well, it has been three weeks since the start of the year nd the forex market is still looking for sustainable trends as it navigates the real money flows resulting from the tumble in stocks and bonds.


So while logic suggests when other markets stabilize, those currencies with central banks pursuing tighter monetary policies (e.g US, UK, Canada, etc) should firm vs. those currencies with central banks likely to lag (e.g. Eurozone Japan). it may take some time before the dust settles. In the meantime, expect more of the same chop until the fmarket can latch on to a theme that produces a sustainable trend.

 

Addendum: January 24, 2022

The week is starting off with the dollar trading a touch firmer ahead of Wednesday’s FOMC meeting with a risk-off cloud still hanging over global markets.

 

For those looking for clues to market direction and when/where real money flows are driving the price action, take the guesswork out of trading by getting access to The Amazing Trader.

 

Jay Meisler, co-found global-view.com and creator of The Amazing Trader

[email protected]

 

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