**Abridged
Version
·
What to Expect for the
US Dollar on
Monday
·
British Pound Sees
Sixth Straight Days of
Gains
·
Canadian Dollar Soars after Finance
Minister Hints of Tax
Cuts
US Dollar –
The last few trading days were
suppose to be quiet with most US and Japanese dealers out for the
holiday. However it has proven to
be anything but that. In fact, we
have not seen this degree of volatility in at least a month. The US dollar has completely melted down with the
Euro and British pound hitting a yearly high against and the Japanese Yen hitting a 2 month high. The triggering of stop loss orders on
Friday has intensified carry trade liquidation in a low liquidity environment.
The EUR/USD’s move from 1.2975 to 1.3075 in 10 minutes at the European open is a
clear confirmation that flow rather than fundamentals is to blame. There was no US data
released today and the financial markets that were open all closed early because
of the holiday. Comments from
Chinese officials about the need for more flexibility in the Yuan and the
country’s currency policy are certainly not helping. Interestingly enough, this was exactly
what happened in 2004 as well. The
US dollar began to breakdown after two weeks
of consolidation on the eve before Thanksgiving. Then on Thanksgiving Day, the EUR/USD
rallied 100 points. The move
extended even further on the Friday after
Thanksgiving and on the Monday when everyone returned from their holidays, the
move actually failed to extend much further.
Instead, the pair consolidated for a few days as EUR/USD longs took more
profits off the table while traders that were short banked their massive losses
and quietly licked their wounds.
Unlike the past week, we do have a very busy trading week ahead of
us. There are a number of central
bank officials speaking from around the world including Fed Chairman Ben
Bernanke who will be talking about the US economic outlook. Data wise, we are expecting data from the
manufacturing and housing market sector along with consumer confidence and third
quarter GDP.
Euro and Swiss Franc
– In the last two trading days, the EUR/USD has
surged over 200 points. The
currency pair is now trading above what we suspect is the European Central Bank’s comfort zone. With only 7 trading days to go before
the ECB meeting, if the EUR/USD does not fall back below 1.30, the central bank
has no choice but to signal to the market that the December rate hike will be
their last and that 3.50 percent interest rates is the peak. Not only does the strong Euro pose a risk
to growth, but it also relieves inflationary pressures, which will give the ECB
a good reason to shift gears.
German exporters actually attempted to downplay the move by saying that
they have no problem with the Euro above 1.30, but they do want to see the ECB
take action if the currency manages to rally up to 1.40. Whether German exporters like it or not,
the strength of the Euro will have an impact on their businesses. Just as New
Zealand reported a record trade deficit
yesterday due to the strength of the kiwi, we expect the Eurozone to also begin
to see deteriorating economic data, particularly as it pertains to trade. Economic data released this morning
confirmed that inflationary pressures are indeed subsiding with German import prices falling for the
second month
in a row. French business
confidence also came out softer, which is hardly a surprise given the recent
trend of weaker economic data. What
was surprising was the uptick in the German IFO report on Thursday. Businesses were more optimistic about
the future which indicates that they expected a continued
acceleration in economic activity.
In the week ahead, The Eurozone is also releasing a number of key data
releases such as French and German unemployment, German retail sales, Eurozone
CPI as well as regional PMI surveys.
Meanwhile the Swiss Franc has also staged an impressive rally today,
confirming that carry trade liquidation is the main theme in the markets. EUR/CHF has sold off for seven
consecutive days, which is something that we have not seen since the beginning
of the year and is particularly rare for a currency that usually range
trades. The week ahead also
delivers a
busy calendar for the tiny country, with the KoF leading indicators, CPI and GDP
the most important
releases.
British Pound –
The
weakness of the US dollar has pushed the British
pound higher for the sixth straight trading day despite slightly weaker GDP data
this morning. Even though the
quarterly growth rate remained unchanged at 0.7 percent, the annualized growth
rate fell from 2.8 to 2.7 percent, led primarily by a decrease in consumer
spending and a sharp drop in exports.
It seems that the strength of the British pound may also be catching up
to the economy. However unlike the
Eurozone, the UK is less export dependent which
means that the strength of its currency should have a smaller effect on the
economy. There are only a handful
of releases for the UK next week, most of which are
housing related.
Japanese
Yen – The Japanese Yen is
now trading on the 115 handle against the US dollar, which is something that we
have not seen since the beginning of September. The fact that the Japanese Yen actually sold off against every
other currency indicates that the liquidation
is primarily out of dollar based carry trades. There are a number of speeches by Bank
of Japan officials next week that can decide whether we will see a near term
bottom in USD/JPY. If Fukui and Noda reiterate
the comments made by BoJ member Fukuma overnight, then we could see support come
into the currency pair. Fukuma said
that there is no preset timing with regards to monetary policy. The BoJ is continuing to play this game
of giving the market a little and then taking it all back, which hurts their
credibility.
Commodity Currencies (CAD, AUD, NZD)
– The commodity currencies are also
stronger as commodity prices tick higher.
The $10 rise in gold is particularly beneficial for the
Australian dollar while the
possibility of tax cuts suggested by Canada’s Finance Minister last night
has helped to cause a massive rally in the Canadian dollar. Even though the trade deficit in
New
Zealand hit a horridly new record high, the
rise in the other commodity currencies has pushed the Kiwi higher as well. The main economic releases from the
commodity bloc next week will be trade data from Australia and Canada along with Canada’s GDP and employment reports.
Previous Articles
Print
Resources
