US Dollar Rally Shows Signs of Slowing Despite Existing Home Sales Data Surprise
The US Dollar hit fresh 3-month highs against the Euro, Japanese Yen and other key currencies, fueled by better-than-expected US Existing Home Sales data on a relatively quiet day of trading. Earlier disappointments in Q3 Gross Domestic Product growth revisions had comparatively little effect as the US Dollar made its biggest moves following the housing data. The US Bureau of Economic Analysis reported that the economy grew at a revised 2.2 percent annualized pace through the third quarter—noticeably below consensus forecasts of an unchanged 2.8 percent print. Yet major markets were little moved by the data, and we would have to wait until later-morning Existing Home Sales results to produce further market volatility. The National Association of Realtors reported that sales of used homes grew by a substantial 7.4 percent through November. The result was nearly triple consensus forecasts of a more modest 2.5 percent gain and led to short-term rallies in the US S&P 500 and the US Dollar. USD traders now look to tomorrow’s New Home Sales data to post similar gains, and we see clear risk of pullbacks on noteworthy disappointments.
The US Dollar has now rallied against the Euro and other key counterparts for the sixth-consecutive trading day. Our proprietary Speculative Sentiment Index data shows that crowds have aggressively sold US Dollar rallies and our contrarian SSI-based systems bought into Greenback strength. Yet the most recent shift shows that crowds have scaled back their USD-short exposure and have actually begun selling the EURUSD. In our experience, such capitulation is often the first sign of a potential turn in price, and traders should be on the lookout for a EURUSD bounce.
Related: Discuss the US Dollar in the DailyFX Forum, Top 5 Events for the Week Ahead
Euro Remains Afloat Despite Greek Sovereign Debt Downgrade
The euro moved modestly lower against the US Dollar but held its own against other major forex counterparts, unfazed by news of further Greek debt troubles. Moody’s became the third major ratings service to downgrade Greece’s sovereign debt rating, but Greek debt actually rallied as Moody’s cut the rating by less than expected. Markets had feared an aggressive three-notch cut to match the equivalent ratings to Standard & Poor’s and Fitch Ratings, and Euro traders breathed a sigh of relief on the more moderate move. Many have feared that a further cut in Greece’s sovereign debt ratings would leave its debt ineligible as collateral for European Central Bank repurchase agreements. Such an occurrence would likely create a substantial liquidity crisis throughout the Greek financial system, but ECB Governing Council member Orphanides assuaged fears and expressed confidence that “the debt of every euro area country will be honored.” Barring a substantive shift in collateral requirements, the Greek debt crisis may have relatively little effect on short-term Euro trading. Traders should instead look to the results of tomorrow’s German IFO Business Confidence data to provide short-term direction for Euro pairs.
Related: Discuss the Euro in the DailyFX Forum,
British Pound Breaks 200-Day Moving Average on GDP Disappointment
The British Pound fell considerably for the second consecutive day of trade, closing below important support at its 200-day moving average and leaving overall momentum firmly to the downside. A disappointing revision to Q3 Gross Domestic Product growth did the bulk of the damage, while a later US Dollar rally only exacerbated the GBP/USD decline. The UK Office of National Statistics reported that the economy shrank a more modest 0.2 percent through the period—better than the initially-reported -0.3 percent change but worse than the consensus -0.1 percent move. Given that the UK is one of the few major world economies that failed to recover through the third quarter, the GDP disappointment only served to worsen investor outlook on the British economy and currency. Traders should subsequently be on the lookout for tomorrow’s key Bank of England Minutes release. The last several BoE Minutes have shown substantial currency volatility given surprise votes on key measures, and tomorrow may be no exception.
Related: UK GDP Growth Revision Disappoints, Discuss the British Pound in the DailyFX Forum
New Zealand Dollar Breaks to Fresh Lows on Poor GDP release
The New Zealand Dollar swiftly broke to its lowest levels in three months on a disappointing Gross Domestic Product release, dropping below the key 0.7000 mark against its US namesake in the moments following the release. Statistics New Zealand reported that the economy grew a modest 0.2 percent through the third quarter, considerably less than consensus forecasts of a 0.4 percent expansion and merely matching the level seen through the second quarter. Recent rhetoric from the Reserve Bank of New Zealand underlined forecasts for relatively robust economic recovery and a “normalization” of monetary policy through the “middle of 2010”. Yet such relatively lackluster growth rates dampened otherwise-hawkish rate expectations.
Overnight Index Swaps currently price in a relatively substantial 203 basis (2.03%) points in RBNZ rate hikes through the coming 12 months—ostensibly giving the New Zealand Dollar a fairly substantial yield advantage versus major forex counterparts. Given comparatively meager forecasts of 92bps in US Federal Reserve rate increases, interest rate markets currently predict that the NZD/USD currency pair will offer a 3+ percentage point yield spread in a year’s time. Such predictions may normally be enough to produce NZD rallies, but market conditions are such that New Zealand Dollar returns will heavily depend on market risk sentiment. Suffice it to say, whether or not the US S&P 500 can hold its recent peaks may have a fairly substantial effect on the popular carry trade currency.
Related: Discuss the New Zealand Dollar in the DailyFX Forum
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Written by David Rodríguez, Quantitative Strategist for DailyFX.com
DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.
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