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- Dollar Dives into the Very End of the Year, Will it Pick Right Back Up in 2011?
- Euro: As the Markets Fill Out, Fundamental and Financial Reality will Return
- British Pound Enjoys a Sharp Rally Not on Housing Data but Year-End Speculative Flows
- Japanese YenSpeculative Positioning May Delay a Fundamental Settling
- Canadian Dollar will have to Hold on to Its Gains to Capitalize on Next Week’s Jobs Data
- Swiss Franc: Examining the Interest Rate Aspect of a Bullish Swiss Currency
Dollar Dives into the Very End of the Year, Will it Pick Right Back Up in 2011?
We ended the trading year with yet another surprise from the US dollar. While thin trading conditions lead to a general state of lethargy for most of the speculative markets, the greenback put in for a standout performance. A third consecutive (and notably aggressive) decline for the Dollar Index notched the lowest close for the single currency in over a month. So, though this move may have occurred during one of the most distorted periods for the year; it could very well set the greenback on a different course come next week / year when market participants return to the market with a sense of conviction. Looking at the condition Friday’s move has left the dollar in; we can separate the majors into two classes of performance. The first group is made up of those pairs that have extended existent dollar bear-trends to new extremes. In this category, we have USDCHF trading at record lows, AUDUSD at a post-float (28-year) high, and USDCAD clearing parity and potentially tipping into a trend after 16-months of general congestion. These are pairs that have taken the critical step towards a much larger, anti-dollar trend. In contrast, other majors are on the verge of decisive moves. EURUSD has corrected back to a frequented area of resistance around 1.3425, GBPUSD is positioned just below a notable reversal point at 1.5675 and USDJPY is within sight of its recently tagged 15-year low.
Looking for the source of this weak performance is important to establishing whether this is an underlying, fundamental trend that will carry through into the New Year. On this point, there were three generally popular explanations that were floated around the financial media today. The superficial account is that confidence in the performance of the US and global economy improved; and capital was shifted away from the safe haven currency to more yield-intensive assets within and outside of the US boarders. This is a standard story for those not looking to dig too deep. While not explicitly incorrect (sentiment does shift), growth expectations are generally long-term and slow to adjust to well-established forecasts. A more conspiratorial reflection on the day’s developments relates an effort to drive the dollar down as ‘window dressing’ for a recovery in European currencies. This is a term that is usually associated to mutual funds that purchase stocks to give the illusion of more diverse holdings and performance. Probably closer to the truth, manipulation is probably more accurately attributed to the distorted liquidity conditions for the day. Extraordinarily thin markets make it easier for deep-pocketed market participants to have a material impact on an asset that would typically absorb large sums of capital any other time of the year.
In the end, abnormal trading conditions is the most likely explanation for the remarkable run against the dollar; and therefore, the risk of a bullish reversal is ominously high. With that in mind, we should head into the new trading year with a more balanced view of direction. It will likely take time for volatility and direction to establish themselves as markets slowly come back on line, funds evaluate for new allocations, banks assign exposure risk and speculators look for clear moves. For the dollar, activity levels should be vested against the bearing on risk appetite trends. However, there will also be an opportunity to jump start volatility and perhaps more distant growth forecasts through key event risk. Service and manufacturing activity figures as well as Fed commentary are notable; but NFPs carries the most clout amongst traders.
Related:Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: EURUSD and GBPUSD Primed for New Year Breakouts
Euro: As the Markets Fill Out, Fundamental and Financial Reality will Return
It is difficult to separate the euro’s performance from the dollar’s unfavorable run this past week. Yet, there has been a level of reprieve found for the shared currency across major counterparts like the franc, yen and commodity currencies. This improvement is more likely position squaring rather than a meaningful recovery in the currency’s fundamental drift. We can come to this conclusion because the developments we have seen these past few weeks have materially undermined the outlook for the Euro-region. With a second EU member forced to take a bailout (Ireland), another being downgraded (Portugal), and the imbalance between strong economies with those struggling between recession and austerity; the market is getting a better sense for the scope of the region’s problems. It is only a matter of time before euro headlines sour once again.
British Pound Enjoys a Sharp Rally Not on Housing Data but Year-End Speculative Flows
The British pound was the best performer (next to the Kiwi) Friday. Again, the sharp rally for the sterling could neatly be tied to the first rise in housing prices (measured by Nationwide) in seven months; but the timing of the move and reminder that the sector trend is still bearish, curbs this thought. More likely is the necessity to cover over-extended, short pound positions on EURGBP, GBPJPY, GBPAUD and GBPCHF.
Japanese YenSpeculative Positioning May Delay a Fundamental Settling
If we look out beyond the short-term where swings in risk appetite trends and the temporary promise of stimulus can spark uncertainty; we can see the yen’s position for what it is. Deeply rooted economic, demographic, credit and financial difficulties will not only keep it a funding currency but will erase any sense of it representing a safe haven. Yet, near-term, extreme short positioning on the yen could trigger a contrarian drive.
Canadian Dollar will have to Hold on to Its Gains to Capitalize on Next Week’s Jobs Data
Through 2010, there has been a material change in the outlook for Canadian economic health and interest rates – and that gloomy turn has certainly weighted the currency. However, USDCAD is its own beast. Strong ties between these two economies stabilizes the exchange rate; and developing trends requires encouragement outside the influence of the larger trends. Perhaps Friday’s employment data can provide.
Swiss Franc: Examining the Interest Rate Aspect of a Bullish Swiss Currency
There are a few means of support for the Swiss franc. The primary source of strength for frequent funding currency is its role as a particular safe haven for European Union investors and private citizens. However, there is further benefit in relative growth and interest rate expectations. We will flesh out the latter concern a little next week with the release of December CPI data. How far away is an SNB hike?
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
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