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FOREX: US Dollar to Decline as Seasonal Forces Take Over Markets

By , Currency Strategist
16 December 2011 08:05 GMT

Talking Points

  • US Dollar Likely to Decline as Traders Unwind Bets on Risk Aversion
  • Australian, NZ Dollars Outperform as Asian Stocks Rise Overnight

The Australian and New Zealand Dollars outperformed overnight as stocks advanced, pulling the sentiment-linked currencies along for the ride. The MSCI Asia Pacific regional benchmark equity index added 0.6 percent, rebounding from a three-week low reached yesterday. The newswires attributed the move to better-than-expected US economic reports, arguing these boosted the outlook for export demand from the world’s top consumer market. Indeed, the New York Fed reported that manufacturers’ sentiment in its home state unexpectedly rose to the highest in seven months while the Philadelphia Fed’s gauge of business confidence printed at the strongest since April.

Although this narrative is compelling, a different dynamic seems to be at work. Indeed, S&P 500 stock index futures – a go-to proxy for overall risk appetite – found a bottom and began to climb at around 5:30 GMT yesterday, long before the US data set came across the wires (and well ahead of the unexpectedly strong Eurozone PMI figures as well, for that matter). Rather than any specific catalyst, we suspect seasonal factors are behind recent price action. While there has been no meaningful progress on resolving the Eurozone debt crisis or assuaging investors’ general unease with the increasingly dour outlook for global economic growth, there hasn’t been significant deterioration either beyond what investors were already aware of. This means that without fresh kindling to feed fires of risk aversion, a period of profit-taking and consolidation had scope to emerge by default.

The markets find themselves just ten days removed from the Christmas/New Year holiday period observed in most major financial centers, with most trend-defining scheduled event risk between now and 2012 already out of the way. As such, traders have likely turned their attention to squaring their books and starting to pack up for vacations, preferring not to force any major moves or over-commit to their positions until January. On balance, this suggests that barring a major change in the overall landscape (like a credit downgrade of a large European sovereign for example), a corrective bounce followed by consolidative sideways trade is the likely trajectory over the near term.

This is precisely the dynamic expected to be at work into the end of the trading week. The European economic calendar offers only low-tier releases. Elsewhere, US Consumer Price Index figures on tap later in the day are forecast to see both the headline and core inflation rates remain unchanged from the previous month in November, meaning investors are unlikely to derive any new insights vis-à-vis the Federal Reserve policy outlook from the outcome. Meanwhile, S&P 500 futures are trading 0.7 percent into positive territory, hinting the unwinding of risk-averse positions is set to continue to the detriment of the safe-haven US Dollar.

Asia Session: What Happened

GMT

CCY

EVENT

ACT

EXP

PREV

No Data

Euro Session: What to Expect

GMT

CCY

EVENT

EXP

PREV

IMPACT

7:00

EUR

EU 25 New Car Registrations (NOV)

-

-1.8%

Low

7:45

EUR

French Own-Company Production Outlook (DEC)

-

-6

Low

7:45

EUR

French Business Confidence Indicator (DEC)

93

95

Low

7:45

EUR

French Production Outlook Indicator (DEC)

-

-35

Low

10:00

EUR

Euro-Zone Labor Costs (YoY) (3Q)

-

3.6%

Low

10:00

EUR

Italian Current Account (€) (OCT)

-

-3530M

Low

10:00

EUR

Euro-Zone Trade Balance s.a. (€) (OCT)

0.5B

2.1B

Low

10:00

EUR

Euro-Zone Trade Balance (€) (OCT)

1.0B

2.9B

Low

Critical Levels

CCY

SUPPORT

RESISTANCE

EURUSD

1.2965

1.3058

GBPUSD

1.5455

1.5589

--- Written by Ilya Spivak, Currency Strategist for Dailyfx.com

To contact Ilya, e-mail ispivak@dailyfx.com. Follow me on Twitter at @IlyaSpivak

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16 December 2011 08:05 GMT