US Dollar Rally Continues, Japanese Yen Down on Signs of Strengthening Global Demand

US Dollar Rally Continues, Japanese Yen Down on Signs of Strengthening Global Demand
The US dollar pressed higher while the Japanese yen lagged on signs of firming global growth. Overnight, Japan’s trade figures showed that exports fell by 6.2 percent in November from a year earlier, marking the slowest decline in 14 months as foreign demand proved supportive of the economic recovery. Likewise, exports rose a seasonally adjusted 4.9 percent from the previous month, which is the biggest gain since November 2002. The news translated into mild gains in the Nikkei, and bullish momentum accelerated in European and US equities as well. Meanwhile, the Chicago Fed’s National Activity index edged up to a four-month high of -0.32 in November from -1.02, with production and income providing positive contributions.

Looking ahead to Tuesday, when the final reading of US GDP is projected to reflect an expansion of 2.8 percent in Q3, which would be the same as the previous result but would be down from the advance reading of 3.5 percent. A surprisingly strong result has the potential to offer a boost to risk appetite, but if GDP is actually revised lower, equities and the JPY crosses could be impacted by risk trends and break lower. Also on Tuesday, the National Association of Realtors’ measure of existing home sales is projected to rise by 2.5 percent to a nearly three-year high of 6.25 million for the month of November. This would mark the third month of growth after sales surged 10.1 percent in October, and as we’ve noted in the past, with the extension of the Federal government’s tax incentive for homebuyers to April 2010, upside potential remains for the housing sector as a whole.

Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week Ahead

Euro Slumps Further as ECB’s Nowotny Suggests Greece Must Fix Problems on Their Own
The euro was mixed across the majors on Monday, but more notably continued its slide lower against the US dollar. There was no new data on hand, but there were comments from European Central Bank Governing Council member Ewald Nowotny that suggested Greece is on their own to fix their fiscal problems. As we discussed on Friday, Standard & Poor’s joined Fitch Ratings on December 16 in downgrading its debt to BBB+. If Moody’s follows suit with a cut to Baa1, down three notches from the current grade, pre-crisis collateral rules would stipulate that Greek bonds won’t be accepted by the ECB. Currently, they're in the clear as the ECB has been accepting bonds rated BBB- or higher as collateral in response to the financial crisis. We questioned if Greece’s fiscal status would serve as an impediment to the ECB’s normalization of monetary policy in the New Year, but given Nowotny’s comment that the central bank “has no mandate or intention to take into account the situation of a specific country, especially not with regard to public finances," it’s clear that is not the case.

Related: Discuss the Euro in the DailyFX Forum,

British Pound Down Ahead of UK GDP Revision on Tuesday
The British pound ended Monday mostly lower, with GBPUSD pushing below Friday’s lows toward the 200 SMA at 1.6000. There were no economic releases on hand, but there was an announcement from the Confederation of British Industry (CBI) stating that they had raised their forecasts for GDP in 2010 to 1.2 percent from 0.9 percent. CBI also predicts that the Bank of England will raised the Bank Rate from 0.5 percent starting in Q2 and will end the year with a Bank Rate of 2 percent. Likewise, the final reading of UK GDP on Tuesday is expected to be changed to a quarterly rate of -0.1 percent from -0.3 percent, while the annual rate may be revised to -4.9 percent from -5.1 percent as more recent output readings have been better than anticipated. That said, the British pound may only respond in a sharp manner if the quarterly rate of GDP growth is revised up into positive territory as the markets will price in the end of quantitative easing by the BOE.

Related: Discuss the British Pound in the DailyFX Forum

Canadian Dollar Dominates After Retail Sales Rise for Third Straight Month, New Zealand GDP on Tuesday
The Canadian dollar has been trading within a range of approximately 1.0435-1.0745 against the US dollar since mid-November, and USDCAD held to these parameters on Monday as the Loonie was the strongest of all the majors. The move came after data showed that Canadian retail sales rose 0.8 percent in October, marking the third straight month of improvement, as consumers spent more on autos, gas, furniture, electronics, building supplies, and clothing. While Canada registered just over 43,000 job losses during October, the trend has been in favor of recovery since February 2009, especially since the net employment change surged by 79,100 in November. Likewise, Canada’s leading economic indicator has been on the rise over the past 5 months, suggesting emerging growth is broad based.

The New Zealand dollar fell against the greenback to test 0.7045 once against, and where price goes relative to this level may hinge upon the release of New Zealand GDP on Tuesday.  The economy may register its second straight period of growth in Q3, as GDP is projected to rise to a quarterly rate of 0.4 percent from 0.1 percent, while the annual rate is projected to increase to -1.3 percent from -2.1 percent. However, there is one key downside risk for this reading as retail sales excluding inflation only rose 0.1 percent during Q3, down from 0.5 percent in Q2. Meanwhile, exports fell throughout Q3, but this happened in Q2 as well and didn’t have too much of an impact on the overall GDP reading. As of Friday, Credit Suisse overnight index swap (OIS) rates were pricing in 203 basis points work of increases by the Reserve Bank of New Zealand during the next 12 months. However, disappointing results could bring OIS rates down quickly, which would weigh heavily on the Kiwi dollar.

Related: Discuss the Canadian Dollar in the DailyFX Forum

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