Do you believe in the Santa Claus rally? No, that ain't a jolly old man who gives away plenty of pips to forex traders who have been nice all year. Only Big Pippin believes in that!
The Santa Claus rally refers to the strong surge in prices towards the end of the year, particularly in equities. Some say that this is a result of profit-taking, tax adjustments, or the happy holiday vibes all over the world as working folks receive their bonuses in December. Others believe that this risk rally takes place because the pessimists in the markets are taking their vacation.
Aside from these usual reasons, here are some more catalysts for a Santa Claus Rally in the forex market:
1. Progress in the euro zone
Is the worst over for the euro zone? This has been one of the most pressing issues for the year, but we've seen a bunch of positive developments in the region lately.
For one thing, the Greek debt deal finally pushed through, allowing the country to secure more funding from the EU and IMF. This was followed by Spain's formal request for a bailout, which made investors hopeful that euro zone's fourth largest economy would have better chances at escaping a default.
Later on, EU finance ministers reached an agreement on establishing a banking union by giving the ECB authority to oversee and regulate all banking activities in the region. The ECB was also granted the power to intervene and save European banks that are showing signs of trouble, reassuring market watchers that the debt crisis won't boil over.
2. Dovish FOMC statement
Wait a minute. Won't a downbeat monetary policy statement spark risk aversion? Well, in the Fed's case, it seems that their dovish outlook led to dollar aversion!
Recall that Big Ben and his men pledged to keep U.S. interest rates low for as long as the unemployment rate is above 6.5% and the inflation rate is below 2.5%. On top of that, they decided to expand their asset purchase program by 45 billion USD in January.
Since this translates to an even longer period of low interest rates and more stimulus, investors probably wouldn't think of holding on to the U.S. dollar! With that, traders might be looking to take advantage of carry trades by parking their money in higher-yielding currencies instead.
3. Approaching U.S. Fiscal Cliff
Here's another reason why market participants would rather bet on currencies other than the U.S. dollar. Last time I checked, the U.S. Congress still hasn't come up with a solid plan for the looming Fiscal Cliff and it doesn't help that time is ticking closer to default o'clock!
With barely a couple of weeks left for negotiations, the fact that Republicans and Democrats refuse to compromise could mean doomsday for the U.S. economy. While this doesn't exactly whet risk appetite, it could stoke demand for higher-yielding currencies whose economies have better prospects in the near term.
4. Prospect of more PBoC stimulus
Based on the Chinese economic figures released earlier this week, it appears that the world's second largest economy isn't doing too well. Their annual CPI missed expectations of a 2.1% increase and came in at 2.0% for November while their trade balance for the same month showed a mere 19.6 billion USD surplus, much lower than the estimated 26.7 billion USD reading.
Components of the trade report revealed that both imports and exports were weaker than expected during the period, as the downturn in global demand weighed on trade activity. This could push PBoC officials to jump into action and implement measures to support economic growth, such as an interest rate cut or a reduction in their reserve requirement ratio (RRR).
In doing so, the PBoC could push the pedal to the metal when it comes to accelerating global economic activity. Although the Chinese central bank hasn't taken any such action yet, expectations of further stimulus could lead traders to price in better growth prospects. After all, we did see several instances when the markets reacted positively to the PBoC's easing efforts!
Do you think that these reasons are enough to keep the risk rallies going until the end of 2012? Got any other potential catalysts for a Santa Claus rally in mind? Don't be shy to share 'em in our comment box below!
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