Global Trading Outlook for January 2017

December was a month of big contrasts. The US Dollar continued to steamroll over other currencies after the Fed raised interest rates and indicated more hikes are likely in 2017. US stocks meanwhile, started off the month strong but were unable to keep their momentum going with the Dow stalling just below 7,000 and the NASDAQ 100 stalling just below 5,000. Crude oil had a great month soaring to its highest level in 18 months following successful meetings between OPEC and Russia but this didn’t have as positive an impact on oil sensitive currencies due to the US Dollar effect.

Because of this my three forecasts ended up not doing much. I had been bullish on the NASDAQ 100 and gold and bearish on USDCAD anticipating that the tension between USD and US stocks would break in favour of stocks rather than the dollar. The NASDAQ 100 and USDCAD ended up flat on the month while gold finished down slightly.

Heading into January, it’s now stocks in the US that look more vulnerable early on with the potential for a USD correction later in the month. On January 20th Donald Trump is scheduled to be inaugurated as the 45th President of the United States after which traders will go from speculating on what he may do in office to reaction to what he actually does (or doesn’t do).

The US Dollar continued to drive higher in December pricing in expectations of 4-5 Fed rate hikes in 2017 above the 2-3 indicated by the December Fed member dot plot. If we get any indications that the Fed may not be as aggressively hawkish as the street is currently expecting (4-5 hikes this year), a US Dollar correction could be in the cards. Some of the more depressed currencies like gold, EUR and JPY could be particularly active if sentiment towards the US Dollar changes.

In particular minutes of the December meeting plus the late January meeting and statement could spark USD activity. Note that if the Fed plans to move as aggressively as the street expects in the last year of dove Janet Yellen’s current term, it would need to raise rates again by March. Rising inflation in the US, Europe and elsewhere could bring an end to the monetary stimulus cycle and force other banks into neutral or hawkish stances as the year progresses.

Q4 and full 2016 year earnings reports kick off this month which could have a big impact on trading in stocks. There is a sizeable risk of a correction in US stocks because the positive effects of Donald Trump’s policies may take a year or more to kick in while the negative impact of the higher US Dollar may hit a lot sooner. Because of this we could see companies whining about the high dollar and either cutting guidance for 2017 or highlighting the forex impact on their earnings just as they were doing a year ago when the US was lower than it is today.

Meanwhile, the underlying world economy appears to be doing really well shown most recently by positive PMI reports coming out of China, the US, the UK and several European countries. This may support stocks and earnings outside of the US and also commodity prices. Copper could be active around reports out of China while crude oil could be active as traders look for signs of whether OPEC and non-OPEC members are keeping or reneging on their promises.

Forecasts for individual markets will return next month.