Volatility remains below historical norms, however, the risk rally over the past 3 months appears to be losing stream suggesting volatility should increase and that a tactical risk correction over the last four to five weeks of the year is on.
Medium-term (six months or so) this should be seen as a buying opportunity for risk-sensitive currencies like EM and G10 risk currencies.
Longer-term (12-months or more) the key factor of FX performance comes down to relative
return differentials. The most common of these is rate differentials. Take the Aussie-US ten-year differential at 1980 levels. Very strong long-term indicator for currency direction.
This is where there is a cross over between short-, medium- and long-term factors cross over and why the next 4 weeks will likely be a short-term opportunity versus the medium-term view.
The key element of a country’s economic potential is the longer-term productive growth rate, from both production and demographics. Now in 2019 and as we move into 2020 those elements are under pressure, productivity growth globally in a low growth environment, and the demographics of the world are shifting from DM to EM.
This is why in the medium term the trend in EM demographics will see risk on, particularly Asian EM. Contrast that with the European Union and Japan which is why most expect EUR and JPY to struggle while AUD, NZD and NOK might actually do better than investors would think due to the medium-term view.
Therefore, in the short term, the best way to play the end of 2019 is likely a slide in USDJPY, AUDUSD and EURUSD. But have a medium view of switching direction early in 2020 as medium-term factors move in.