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Aussie and Kiwi Skyrocket, Dollar Dump Ensues

Aussie and Kiwi Skyrocket, Dollar Dump Ensues

2011-12-20 14:45:00
Christopher Vecchio, CFA, Sr. Currency Strategist

Fundamental Headlines

Republicans May Force Impasse Over Payroll Tax – Bloomberg

U.S. Housing Starts Jump 9.3%, to Highest in Year – Bloomberg

Spain Borrowing Costs Dive – Reuters

Dictator’s Death Stokes Fears – WSJ

German Economy Rides Out Storm – WSJ

European Session Summary

Higher yielding currencies and risk-correlated assets have shot up in a straight line against the U.S. Dollar, which as of the start of trading in New York, had not seen one positive tick all day. Indeed, the U.S. Dollar Index (Ticker: USDOLLAR) traded off of its opening print, and coincidentally session high, in both the Asian and European sessions. While a small part of the rally during Asia may have been short covering, the second leg of the rally that transpired during the European session, comes after some encouraging developments across the continent.

First, a German business-confidence report from the Ifo showed that economic expectations are improving and business conditions remain favorable. The print beat the forecast figure, and the actual print was even more surprising considering that a decline was expected. While any signs of German resilience could be cited a reason for the European Central Bank to avoid cutting rates again, it is likely that the ECB will continue to pursue a loose monetary policy for some time going forward.

Additionally, at a bond auction on Tuesday, short-term Spanish borrowing costs plunged amid strong demand. It appears that banks are soaking up the stale debt once more, on promises that the ECB will step in and allow European banks to borrow at ridiculously low rates; essentially, the ECB has set out on a path of monetizing debt indirectly.

USD/CAD 5-minute Chart: December 19 to 20, 2011

Aussie_and_Kiwi_Skyrocket_Dollar_Dump_Ensues_body_Picture_10.png, Aussie and Kiwi Skyrocket, Dollar Dump Ensues

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Overall, the net effect has been positive for higher yielding currencies and risk-correlated assets. The U.S. Dollar dump has mainly been led by a shift to the Australian and New Zealand Dollars, which were up over 1.3 percent each, at the time this report was written (ADDENDUM: the NZD/USD was up 2.01 percent 15-minutes into NY trading; the AUD/USD was up 1.90 percent over the same time frame). Similarly, the EUR/USD pushed back towards the 1.3100 exchange rate, having found some significant buying interest near the 1.3000 level yesterday.

24-Hour Price Action

Aussie_and_Kiwi_Skyrocket_Dollar_Dump_Ensues_body_Picture_7.png, Aussie and Kiwi Skyrocket, Dollar Dump EnsuesAussie_and_Kiwi_Skyrocket_Dollar_Dump_Ensues_body_Picture_1.png, Aussie and Kiwi Skyrocket, Dollar Dump Ensues

Key Levels: 14:00 GMT

Aussie_and_Kiwi_Skyrocket_Dollar_Dump_Ensues_body_Picture_4.png, Aussie and Kiwi Skyrocket, Dollar Dump Ensues

Thus far, on Tuesday, the Dow Jones FXCM Dollar Index is much lower, trading at 9961.87, at the time this report was written, after opening at 10060.01. The index has traded only higher, with the high at 10060.01 and the low at 9961.12.

--- Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, send an e-mail with subject line "Distribution List" to cvecchio@dailyfx.com.

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