Beneath all the events and news releases that forex day traders thrive on are the economic forces that shape and drive currencies in directions. Hence the quotation "the trend is your friend" and a true understanding of global currency markets is derived from an understanding of global macroeconomics and the forces that determine economic growth across the globe.
To understand where the USD is going as a currency for 2020 we need to broaden our analysis and take a look at the US Fed and the US stock market.
Markets today more than ever are interconnected through the technology of instant communication. A sneeze in the stock markets could cause a cough in the bond markets and before you know it the currencies are off to the races as the winged messages of investment decisions from trading room to chatroom to home. Perhaps this maybe the reason why many a time traders in the retail forex markets watch for important key news events and then pull the trigger with alacrity on each data release fully expecting the traditional knee-jerk reaction of follow-through buying and selling. Yet, more often than not, and mostly to be discerned in the retail forex markets, currencies may take the traditional nosedive only to about face en masse with a gut-wrenching reversal a mere three minutes later as the large macro minded traders appear at the fore moving the currency pair in the direction of the trend as per their macroeconomic outlook of all markets as a whole. Though forex trading maybe a distinct investment arena, increasingly today currencies are connected to what else is going on in stock markets, bonds and commodities and so forex becomes a mere slice of the complete spectrum analysis.
2020 is a paradigm shift in the US stock markets. Hundreds of media pundits are crying at the insane P/E ratios and continue to draw upon historical illustrations to portray the fabric on unwinding chaos and possibility of a huge US stock market crash. For the forex trader such a crash would result in a huge nose dive for the USD. If foreign investors were selling their USD stocks and corporate bonds then wither the strength of the USD? But does history keep on repeating itself ad infinitum? We do hear this all the time; history will repeat itself and woe betide the weakest long in a market at insane stock price levels. but while the small time trader frets whats really going on? Why is the US stock market going up and up and up?
An important key to the story for 2020 would be the actions of the US Federal reserve and certainly their behavior and actions in the inter-bank lending market will become a critical point of analysis to understand why some of us feel for a paradigm shift in US stock markets.
Please turn to the US Fed data on money market activity - reverse repo and repo
https://www.newyorkfed.org/markets/data-hub
and should you go through the recent two month activity you would notice how the US Fed has stepped up its lending activities to the banking sector. The sudden jump to the tune of hundreds of billions USD is the first-shot and a warning for all investors that the US Fed is not to be trifled with in 2020. The debacle of 2008 caught the US Fed with its pants down and while it took a long time to clean the credit markets the regulatory climate re-molded its own fabric to ensure that pressure points do not ever build up again unnoticed. The data on repo is interesting. The sudden activity of the Fed is all but in fact a form of Quantitative Easing though nobody dares talk about this at the moment.
Who are the beneficiaries of the sudden UD Fed repo operations that plushed the commercial banks with cash the last two months?
* Fortune 500 companies
* Hedge funds (now mostly containing bank investor stakes)
* US pension funds
* Insurance companies
The Titans of Wall Street will now find themselves fully armed to buy even more US stocks.
What does that spell for P/E ratios? Well, this is the new New and while pundits on television may get nervous and scare people to death about the prices of their stocks and query if this is a good time to sell those stocks, the reality if that US stock market may yet find itself chugging along and heaving and puffing against all media opinion in defiance.
Would you bet on the US Fed not taking decisive prompt action at the slightest sign of economic slow-down? I think not. This is not 2008. There are no Lehman-Bear type scenarios here. And certainly US interest rates are not going to crash to zero and remain positive versus other major economy interest rates and so the argument of a lower USD becomes a subject less likely.
Wither the USD against major pairs? On the whole by the end of 2020 - Up - as an asset holding currency.
The one sour note though is the continuous China trade disagreement which could be the one blot on the strength of the USD as a whole next year. But one blot out of two is by no means a red flag for the USD in 2020. Eventually, one would think the posturing in trade talks would find resolution between USA and China next year. So we come back to the US Fed and its eyes on the US stock market. Up or down? Up. Not because this is an election year but because the US Fed has ingeniously learnt not to crash the economy like 2008 and institutional stock buying of Fortune 500 companies is going to at the very least support the US stock markets and the strength of the USD versus major pairs.
The US Dow may correct as investors get nervous on seasonal poor earnings reporting but 3-4 sudden thousand point drops does not constitute a media theme of total collapse but indeed a correction is a correction and merely a reflective pause. The US Dow may trade sideways to up for 2020 in a five thousand point band and yet still push above the highs of this year should the summer season halt the softening of the US labor market. For the USD the currency would certainly be bid set against this backdrop of US stock market consolidation albeit at dizzying heights. International investors chasing yields are going to want a piece of the Fortune 500 action and that would leave the USD most definitely bid.
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