US Dollar May Gain as Currency Markets Turn to Risk Trends for Direction Cues

Key Overnight Developments

• New Zealand Commodity Export Prices Gain for Tenth Month
• Euro Flat, British Pound Higher Against US Dollar in Asian Trade

Critical Levels



The Euro tested as low as 1.4457 in overnight trading but prices could not sustain below 1.4460, rebounding yield an effectively flat result ahead of the opening bell in Europe. The British Pound traded higher to test near US session highs just below 1.62 against the greenback. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.


Asia Session Highlights



The ANZ Commodity Price Index revealed that the cost of New Zealand’s top export goods on global markets rose 2.6% in December, marking the tenth consecutive monthly increase (albeit the smallest one since July 2009). Aluminum prices led the index higher, adding 11.7% from the previous month as global fiscal stimulus efforts (often focused on infrastructure projects) boosted industrial production. Perhaps most significantly, prices in terms of the local currency rose 1.7% from a year before, the first annual increase since November 2008, despite a 17.6% increase in the trade-weighted value of the New Zealand Dollar over the same period. This suggests demand may be getting strong enough for the central bank to gradually increase interest rates without worrying too much about a stronger currency’s negative impact on overseas demand, a central concern over recent months considering exports amount to over 30% of New Zealand’s economy.


Euro Session: What to Expect



UK Industrial Production readings are expected to show continued improvement in November, with output set decline -6.1% from the previous year, the smallest annual drop in 14 months. Output has rebounded from a record low in February over recent months as close to $2 trillion in combined global fiscal stimulus underpinned overseas demand. Production figures may also see a boost as UK firms bring their manufacturing operations back onshore amid concerns about poor quality and rising freight costs. Indeed, a report from the Engineering Employers’ Federation and accounting firm BDO published earlier this month revealed that one in seven companies moved its production centers back to the UK from abroad over the past two years.

Germany is set to release its annual Gross Domestic Product and Budget Deficit figures, with expectations suggesting the economy shrank -4.8% (marking the largest decline in the postwar period) while the fiscal shortfall amounted to 3.5% of total output, the most in at least two decades. Despite the seemingly potent nature of the headline figures, the data is unlikely to prove market-moving considering traders have long since priced in the underlying trends behind the outcomes.

On balance, equity markets may prove to be the dominant driver for price action as the inverse correlation between risky assets and US Dollar begins to return after fading in December. Indeed, the short-term (20-day) correlation between the Dollar’s average value and the MSCI World Stock index is now -56%, up from -0.03% just two days ago and the highest in over a month. This may prove to work in the greenback’s favor as China pulls back monetary stimulus, announcing a 50 basis point increase in bank reserve requirements and allowing long-term borrowing costs to push higher. China had been one of the central pillars upholding the argument for a robust recovery in global growth and an aggressive move toward tighter monetary conditions is likely to weigh heavily on risk appetite.


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