As the end of the week came to a close, trade deals were signed, President Trump’s impeachment proceedings gathered pace, while events in the Middle East have, at least for now, taken a back seat. All this as equities make record highs.

FX has for the most part been quiet with the major currencies chopping around in familiar ranges with maybe only JPY crosses showing some real signs of life.

So what did Friday bring?

USD strength would be the simplest answer. Why? Weak retail sales data from the UK certainly didn’t help GBP’s cause. Couple that with the highest housing start number in the US for 13 years and you have some late-week momentum.

EURUSD would also suffer as traders unwound long EURJPY positions. USDJPY itself was happy to trade in a tight range above 110.00. Equity markets around the globe would be in the green despite China’s economy growing at its slowest pace for 29 years.

Saying that, 6% for the world’s second-largest economy is still impressive.

US equities would open higher but by the European close were virtually unchanged. EURUSD traded down to 1.1087 and GBPUSD to 1.3010. AUDUSD would slip to 0.6872 and USDCAD rally to 1.3075.

As mentioned, USD strength dominated Friday. But the day itself would die a death early ahead of the holiday weekend with little action during the US afternoon.

Equities hung on to some gains with the DJ closing +50 points despite a sharp drop in Boeing stock.

The S&P and the Nasdaq also closed in positive territory. The one index that didn’t was the Russell 2000 which I will touch on in my technical piece.

As for the week ahead, there is little in the way of US data, although we do have interest rate decisions in Canada and Europe as well as the annual Davos forum in Switzerland. All eyes on President Trump’s impeachment trial!

As mentioned I wanted to quickly look at the Russell 2000 Index. The Index tracks 2,000 small-cap stocks and is often seen as a broad measure of the smaller, more domestically focused companies in the US.

What I have here is a daily chart of the Russell 2000 (green and red) and have added the S&P 500 (orange) over the same period.

Obviously, there is a strong correlation between the two, but you will notice in August of 2018 the Russell was outperforming the S&P and made a high at 1,740. What we saw then was a 27% correction down to 1,260 by the end of December 2018.

That was a period when there was a correction across all markets, but in the US none more so than the Russell 2000. Since then we have gradually retraced.

But, while the DJ, S&P and Nasdaq have all gone on to make new all-time highs, the Russell has failed to do so and is still 40 points shy of that August 2018 high.

My point here is that equity market strength has been dominating the headlines for months and many are calling for a pull-back. If the Russell 2000 fails to make a new high, that could well be the catalyst for a broad market reversal which in turn has implications for FX and commodities.

So just keep an eye on the small-cap market over the next couple of weeks for warning signs of an impending change of sentiment.

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David Hannigan

A graduate of the Cass Business School, Dave's career began with Credit Suisse as an Equity Options Trader on the London Stock Exchange, before moving into the world of FX with Chemical Bank and Citibank. 1994 saw him join National Australia Bank, first as a Senior Dealer, then Senior Vice President and Chief Dealer.

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