Despite slow Asian and European sessions, the US and Australian dollars have assumed leadership roles, while the British pound and euro both struggle beneath the weight of political and economic uncertainty.
It was a very quiet night of FX trading as currencies traced out very narrow ranges in listless dealing with no fresh news to move the markets. The euro once again failed to clear the 1.3080 level and then quickly fell into the 1.3030's after the release of Eurozone GDP showed exports posted the biggest decline since Q1 of 2009. Furthermore, comments from Italy’s Pier Luigi Bersani offered no hope of a solution to the Italian election quagmire.
The GBPUSD pair was also weaker on the night, slipping below the 1.5100 mark as traders reacted to Parliamentary testimony of outgoing Bank of England (BoE) Governor Mervyn King, who admitted that “too big to fail” was still the primary problem facing the UK banking sector.
King also noted that he would like to see leverage ratios reduced to the 10-20 level. Such sharp reductions would cause a significant contraction in UK credit creation and FX markets reacted negatively sending pound to a low of 1.5070.
The price action in cable must be of great concern to the bulls. The pair failed to hold the 1.5200 level on Tuesday despite the better-than-expected UK PMI services report and ended near the day's lows. Today's early selloff even further into the 1.5000 territory indicates that investor sentiment towards sterling remains resolutely bearish and suggests that we may see another possible run at the 1.5000 level before the end of the week.
Aussie Dollar Gets Big Vote of Confidence
Meanwhile, the Australian dollar (AUD) continued to display relative strength, rising to a high of 1.0300 against the US dollar (USD) in late-Asian trade after Australian GDP was in line with projections.
Australian Q4 GDP printed at 0.6% on a quarter-over-quarter basis and recorded a very respectable 3.1% year-over-year gain. The data showed that despite the recent slowdown in activity, the Australian economy remains one of the better performers in the G-20 universe.
The Aussie, which made a spike bottom near the 1.0100 level on Monday, continued its recovery, but ran it resistance near the 1.0300 level. Still, AUDUSD appears to have stabilized after retail sales and GDP reports this week assuaged investor concerns about the slowdown in economic activity down under and removed speculation that the Reserve Bank of Australia (RBA) will lower rates further in the short term.
See also: Pound, Aussie Survive “Do-or-Die” Data
Italian Quagmire Keeping Euro Pinned Down
The EURUSD continued to drift lower as the European morning progressed with the Italian political situation still mired in a deadlock. Bersani dismissed the possibility of putting together a coalition government with Silvio Berlusconi and admitted that in the present state, he could not guarantee stability in Parliament. While Italian politics remains at a standstill, it is difficult to imagine how the euro could get any upside traction. The EURUSD pair has been trapped in a very narrow range this week while markets continue to await some sort of resolution in Rome.
US Dollar: The World’s Newest “Risk” Currency
In addition, the widening gulf between US and Eurozone growth rates may have changed the key dynamic in the pair, with the dollar now seen as a possible risk currency rather than just a repository of safe-harbor funds. Therefore, positive US news may now favor the buck and push the EURUSD further down, even if the political and economic situation in Europe stabilizes.
In North America today, the economic calendar is relatively quiet, but the early focus will be on the ADP employment report. The market is looking for a print of 172K versus 192K the period prior. However, if the data comes closer to the 200K mark, it could provide another boost for the dollar, offering yet another confirmation of US relative strength.
By Boris Schlossberg of BK Asset Management