Top Ten Trading Themes To Start 2016

As 2016 opens up I want to take this opportunity to review the major trading themes in play as we head into 2016. As we finish digesting our festive fun, now is a great time to take the pulse of the major trading themes dictating market action as we open the books for the year.

1. CHINA

As traders returned to their desks today one of the major themes from 2015 appears to be rolling over into 2016. In the late summer of 2015 concerns about the Chinese growth outlook took center stage, post the PBOC intervention in FX markets to defend the Yuan. A major PMI miss overnight has rocked risk sentiment and has traders starting the year looking for safe haven protection of the JPY.

2. FED

After the much anticipated rate hike from the FOMC at the back end of 2015, policy divergence is set to once again take center stage as trade gets under way in 2016. Attention now turns to to the rate of potential rate increases in the US, Fridays Non Farm payroll release will set the tone for expectations of the next move, a solid number will garner support for another increase an support USD

3 EU

Commodity price declines are likely frustrating the ECB Chief Draghi, the illusive 2% inflation target has the market positioned for further easing from the ECB, ahead of the Fridays Non Farm Payroll data, the market will get a raft of Eurozone inflation data this week, traders will be eyeing this data closely as sustained weakness in this data will likely see players add to EUR shorts.

4. BREXIT

One of the many political curve balls for the year ahead will be the guessing games regarding the timing and outcome of the United Kingdom referendum regarding it inclusion in the European Union, the market believe the referendum will come in the summer of 2016, with such uncertainty looming regarding the Yes/No vote on inclusion and the potential impact on UK growth prospects via trade, this dynamic likely sees the BOE sidelined until later in the year.

5. BOJ

Out of the G7 major central banks the market believes that the BOJ is the least likely to be a major actor in 2016, after leading implementing the three arrows of Abenomincs, markets sense that the BOJ are unlikely to enact further easing at this stage especially as the FED have made their initial normalization move which likely keeps the USDJPY broadly supported. The risk to this view will be an escalation in risk aversion which may concern the BOJ.

6 US PRESIDENTIAL ELECTIONS

As we finally enter the home straight on the protracted US political cycle attention will begin to shift towards serious contenders for the party nominations ahead of national Presidential Elections later in the year. This election cycle the market has to deal with the possibility of tightening monetary policy in the form of further Fed rate hikes. Since 1980, we have seen the 1984, 1988, 2000 and 2004 election years accompanied by the commencement of a rising Fed rate cycle. Interestingly, 1984, 2000 and 2004 were essentially frustrating range-trading years, while 1988 was spent recovering from the October 1987 market crash.

7 EMERGING MARKETS

While the US maintains a slow and steady rate increase policy it is likely that Emerging Market FX continues to feel the brunt of the USD bid, the challenge for Emerging Markets is servicing increasing debt levels which are principally priced in USD, this scenario would be exacerbated by G7 inflation increases that dont necessarily translate into external demand which will further undermine Emerging Markets.

8 COMMODITY CRASH

One of the major drivers of FX trends in 2015 was the precipitous decline in commodity prices from Crude to Copper the commodity sector was hammered last year and this had a direct read through to commodity currencies AUD, CAD, BRL and MXN which offered some of the best trend opportunities in 2015, with China growth concerns front and center again commodities are of to a soft start in 2016 and traders will look to reposition for trend continuation should risk aversion continue to develop.

9. GEO POLITICS

Last year markets were once again reminded of the significant Geo Political risks that are on the radar, the attacks in Paris by ISIS were a harrowing reminder of the radical undertones that persist in the Middle East. Overnight Geo politics are once again at the top of the tape with Iran and Saudi Arabia tensions heightening due to Saudi Arabia executing an Iranian cleric over the weekend has led to an uptick in regional political tensions and put a mild bid under crude.

10. JANUARY SEASONALS

As we start 2016 I always like to cast a quick eye over any seasonal trends that are worth keeping in mind as the year kicks off. For FX traders it is noteworthy that December is historically the most bullish month for the EUR since inception. With a decline this December as market digested the first rate move from the FED, the EUR has started January on the front foot although historically January has been the weakest performing month for the EUR since inception.

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