For Americans, Thanksgiving is the day when the holiday season starts. For traders, it also usually means the start of a bullish trend that often lasts to the end of the year. But Black Friday usually is particularly good for the markets, with three quarts of the time ending in the green.
What this means for forex traders is a generally risk-on environment that often comes at the expense of the dollar, but can see commodity and emerging market currencies booming. And it’s not just a short-term thing. Historically, sentiment swings to risk-on for the coming six weeks 80% of the time.
Now, of course, just because markets behave a certain way most of the time, it doesn’t mean this time it will be the same. But, there are some good reasons to think the pattern will repeat. Black Friday is, after all, the day of deals, which sets people up psychologically to buy.
Also, the US market is open for half a day. Typically the big traders are off for the long weekend, meaning there is thinner volume. This allows the upbeat attitude to have a bigger effect on the stock market, as traders position for the weekend. Green across the board in stocks might make currency traders more willing to take risks.
Since the phenomenon of general risk appetite through the end of the year is well-known, investors are likely to try to pre-position for it. That means it becomes something of a self-fulfilling prophecy.
This year, however, there are some reasons to suspect traders might be particularly bullish. Which is probably bad news for the dollar. Or maybe it’s a general expectation that the dollar will underperform going forward that helps fuel a shift towards riskier assets.
The markets are starting to get increasingly comfortable with the idea that central banks will start moving to cut rates. Futures contracts are pricing in a high chance that the Fed will cut rates in the second quarter. Money markets are also pricing in the ECB cutting as soon as the first quarter is over. And even the BOE is expected to start cutting in the first half of the year.
All of that contributes to expectations that major currencies will be on the backfoot through the coming months. Meanwhile, the RBA is seen likely to keep tightening, with the NZD potentially dragged higher through arbitrage.
The hope for most economists is that the US manages to avoid a hard landing, meaning the country will see at least decent economic growth. Usually growth contributes to a stronger currency, but the high level of government spending implies that increased government revenue could push down yields. That better economic performance could also help emerging markets as the US would import more raw materials.
Of course there is always the possibility of a surprise event that will end the rosy outlook. However, that is likely to be farther from traders’ minds as they think about Black Friday deals. When Monday comes around, however, there might be a reassessment.
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- Source: https://www.orbex.com/blog/en/2023/11/trading-on-black-friday-discounts
