Slowly but surely, we head towards the end of the trading year. Before arguing that there is still one full quarter ahead of us, in the trading world, this is the shortest quarter of them all.
It is all about December and the end of the year positioning. Already from the second half of November, the liquidity begins to dry out. Into December, large institutional traders already think of the next year. In some cases, internal regulations force them to close positions ahead of the end of the year – or well in advance.
In other words, we face at least two months of decent liquidity. These two months will manily be influenced by the U.S. Election.
In a recent report, Deutsche Bank highlights its views for the rest of the trading year. Considering that it is running one of the largest research departments in the world, it is worth having a look at what it has to say.
Deutsche sees the crude oil price having a modestly bullish bias heading to the end of the year. The argument behind it is that the inventories are likely to decline as demand picks up. Also, the modest but steady recovery in the price of oil should extend into the next year as well.
The ECB is seen as easing in December, not in October, as many would think after this week’s German, French and Italian inflation data. If we put the data together and try to anticipate the impact on Friday’s HICP, the core inflation might drop even more, possibly to +0.2% or lower.
The ECB will likely ease in October instead of waiting until December, but it may use the October meeting to warm-up the markets and just send a dovish signal.
Surprisingly, Deutsche Bank sees further easing from the Bank of England in November. This time, the BOE is seen as adding an extra GBP60 billion in November to its quantitative easing program. Interestingly enough, it may just be a step towards negative rates – a move likely to come only in the event of a hard Brexit.
Finally, Deutsche Bank sees the EURUSD exchange rate at 1.20 at the end of 2020, 1.25 at the end of 2021, and 1.30 at the end of 2022. Something has to change on either side of the Atlantic for the EURUSD to move that much without meeting the ECB’s dovish commentary.
Could it be the outcome of the upcoming U.S. election?