Talking Points:
- US Dollar corrects broadly lower as liquidity rebuilds after holidays
- Aussie Dollar outperforms on upbeat China PMI, NZ Dollar follows
- Euro may look past German inflation uptick, US ISM survey in focus
The US Dollar corrected lower overnight having traded broadly higher against its major counterparts in yesterday. The Australian and New Zealand Dollars proved best-supported, which may reflect the two currencies’ allure as the highest yielders in the G10 FX space. This makes them natural alternatives to the greenback when an adverse shift in the Fed rate hike outlook undermines the US unit.
The Aussie narrowly outperformed, finding a bit of an added boost in an upbeat Caixin China PMI reading. The report suggested manufacturing-sector activity growth accelerated to the fastest rate since January 2013. Supportive news flow from China – Australia’s largest trading partner – often boosts the latter country’s currency as traders weigh positive spillover possibilities.
On balance, price action seen thus far since the beginning of the week seems to reflect returning liquidity after the holiday drain rather than a well-conceived response to specific news-flow. A degree of seesaw volatility is to be expected as traders return from year-end hibernation and reevaluate the landscape. With that in mind, it seems premature to expect follow-through on moves currently on offer.
German CPI figures headline the economic calendar in European trading hours. The headline year-on-year inflation rate is expected to hit 1.4 percent, the highest in three years. The outcome may do little to boost the Euro however considering its limited implications for ECB monetary policy after the central bank committed to pursue QE through the remainder of 2017.
Later in the day, we shall see December’s US manufacturing ISM survey is able to rekindle speculation about the on-coming FOMC policy trajectory in earnest. The report is expected to show that factory sector activity grew at the fastest pace in 23 months. With USD hovering near a 14-year high, prices may prove more sensitive to a downside surprise that dents confidence in the hawkish narrative versus the alternative.
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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com
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