Top Trading Opportunities For 2018

The Euro is running out of reasons to rise, inflation might push the BoE to hike which can boost the British Pound, and a supply glut might send crude oil lower. What else in 2018?

Short: EUR vs. USD, GBP – The Euro is Running Out of Reasons to Rise

By Ilya Spivak, Senior Strategist

The Euro enjoyed an undeniably stellar year in 2017. That seemed improbable on January 1 amid fears of Eurosceptic triumph in key elections. Investors still shell-shocked after the Brexit referendum and the US presidential election braced for the worst. Their fears did not materialize. The status quo held in the Netherlands, France elected an energetic centrist in Emmanuel Macron, Italy managed the abrupt transition from the Renzi to the Gentolini government, and Spain muddled through a separatist flare-up in Catalonia. A pickup in economic growth sealed the deal, handing the single currency double-digit gains on the year.

Having bypassed these political pitfalls however, the Euro may be out of reasons to continue building higher. The ECB isn’t likely to be very helpful just as the spotlight returns to monetary policy. It has already set the near-term fate of QE asset purchases and probably won’t be quick to alter it. Significant tightening seems unlikely as the 2017’s Euro gains filter into on-year CPI data, slowing progress to the inflation target. Meanwhile, a nasty outturn in Brexit negotiations remains a potent threat to financial stability on both sides of the English Channel. Tactically, short EURUSD and EURGBP positions seem best to express Euro-negative policy divergence and relative underpricing of Brexit risk premium.

Long: GBP/NZD As Hurdles to Inflation Diverge for BoE and RBNZ

By James Stanley, Currency Analyst

Last year for our top trades, I looked into a long EUR/AUD setup under the presumption that we’d see the ECB begin to shift towards tighter policy while the RBA tried to avoid the topic of rate hikes altogether. We didn’t quite see that shift in the ECB in the way that I was expecting, but that mattered little as bulls continued to pile on to the long Euro trade as data, growth and inflation continued to print with some semblance of stability in the bloc. For next year, I want to look at the long side of the British Pound: As inflation remains above 3% in the U.K., the Bank of England may need to look at tighter policy options before too long. We did get a rate hike in November – but this was done in such a dovish manner that the Pound folded over immediately after, where it remained at support for a couple of weeks before bulls came back into the fray.