Major Currencies vs. US Dollar (% change)
15 Nov 2010 – 19 Nov 2010
Last week’s price action proved indecisive as global equities and the US Dollar – the benchmarks for their respective sides of the “risk on” vs. “risk off” argument – closed little changed on Friday. A tug of war between conflicting forces made for choppy price action, with supportivecues from Ireland as the debt fiasco inched toward resolution and a fierce defense of QE by Ben Bernanke being offset by news that China will step up efforts cool inflation (and thereby economic growth), raising reserve ratios by 50bps by the end of the month.
Looking past recent headlines, the balance of competing catalysts driving price action is likely to tip the scales in favor of renewed risk aversion. Indeed, risky assets have retraced less than a quarter of the rally built around Fed QE expectations since August that started to unravel after the central bank delivered just about what had already been priced in at the beginning of this month, leaving the advance without the impetus to continue. This leaves plenty of room for a deeper correction, with the proximity of the winter holiday season making it all the more likely that traders will resume taking profit on QE-linked bets in the weeks ahead.
EURUSD: Euro to Resume Decline as Risk Trends Dominate
The correlation between the Euro and underlying risk appetite faded a bit from last week after the Irish debt fiasco obscured the relationship, but sentiment remains the most dominant driver of price action. To that end, we expect recent gains to prove corrective within the context of larger down move as risk aversion makes its come-back in the final weeks of the year. Preliminary Euro Zone Consumer Confidence and PMI figures for November headline the economic calendar as traders size up private demand amid a lurch toward fiscal austerity across the region. The final revision of third-quarter German Gross Domestic Product figures as well as the November’s IFO Survey of business confidence is also of note. We remain short EURUSD.
GBPUSD: Pound to Track Risk Sentiment Amid Profit-Taking
Risk sentiment has tightened its grip over British Pound price action, hinting the UK unit is heading lower against the US Dollar should risk aversion return as expected. On the economic calendar, the second revision of third-quarter Gross Domestic Product figures takes the spotlight, with traders most concerned to see the breakdown in contributions to overall growth as the outlook on monetary policy continues to be torn between an inflation rate stuck stubbornly above 3 percent and the need for support as the onset of an ambitious austerity plan draws ever closer.
USDJPY:Yen to Fall as Yields Continue Post-QE Correction
Relative borrowing costs remain in focus, with USDJPY continuing to track the spread between US and Japanese 2-year treasury yields. On balance, this likely amounts to Japanese Yen weakness as US yields – depressed over recent months on the very same QE expectations that drove risky assets higher – stage their own correction. October’s Trade Balance and Consumer Price Index figures stand out on the economic calendar. We are long USDJPY.
USDCAD, AUDUSD, NZDUSD:Commodity Bloc Likely to Underperform
Risk trends remain firmly in control of the commodity Dollars, keeping the spotlight on the post-QE correction likely to resume across financial markets. Indeed, the relatively higher yields offered by these currencies that made them greater beneficiaries of the pro-risk environment in recent months may also prove to see them underperform the other majors against the greenback. Canadian economic data offers the only bit of event risk, with October’s Consumer Price Index figures as well as September’s Retail Sales report on tap.
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