FOREX: Dollar Gains as Traders Look for US Growth to Outperform in 2011

http://www.dailyfx.com/forex/fundamental/daily_briefing/session_briefing/euro_open/2011/01/03/FOREX_Dollar_Gains_as_Traders_Look_for_US_Growth_to_Outperform_in_2011.html

Key Overnight Developments

• US Dollar Rallies Despite Firm Risk Appeite in Overnight Trade
• Chinese Service Sector Posts Weakest Growth in Three Quarters

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3239	1.3386
GBPUSD	1.5427	1.5660

The Euro and the British Pound sold off in overnight trade, down 0.7 and 0.4 percent against the US Dollar as the greenback pushed broadly higher against most of its major counterparts (see below). We remain short EURUSD.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
CNY	1:00	China Non-manufacturing PMI (DEC)	56.5	-	53.2

The US Dollar staged an impressive rebound in the first trading session of 2011, rising 0.3 percent on average against its top counterparts. The advance appeared corrective after the greenback slumped for the seven consecutive sessions through the end of last year. Curiously, the typically safety-linked US currency advanced even as Asian shares advanced, with the MSCI Asia Pacific ex Japan regional benchmark stock index rising 0.7 percent. Japanese markets were closed for a bank holiday.

However, it was the Canadian Dollar that would take top honors overnight, soaring 0.7 percent on average against the majors. The most robust rate hike outlook for the year ahead may account for so-called Loonie’s stellar performance, but the overnight index swaps that serve as the basis for gauging traders’ priced-in forecast have not traded since December 23rd, hinting that a re-appraisal for the Canadian unit’s allure in the days ahead.

Chinese Non-Manufacturing PMI figures showed the sector accelerated for the first in three months in December, although taken together the last three months of last year proved to yield the slowest expansion in three quarters.

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
CHF	8:30	SVME-Purchasing Managers Index (DEC)	62.0	61.8	Medium
EUR	8:45	Italian PMI Manufacturing (DEC)	52.2	52	Low
EUR	8:50	French PMI Manufacturing (DEC F)	56.3	56.3	Low
EUR	8:55	German PMI Manufacturing (DEC F)	60.9	60.9	Medium
EUR	9:00	Euro-Zone PMI Manufacturing (DEC F)	56.8	56.8	Medium

Risk appetite looks well-supported at the beginning of the trading week, with European stock index futures showing impressive gains ahead of the opening bell. In the past, this would be taken to imply weakness for the previously safety-linked US Dollar, but such a connection can’t be made so easily this time around. Indeed, the greenback advanced even as shares rose in Asia and has been taking session highs against the Euro and the British Pound even late into the overnight period, pointing to considerable momentum.

Traders are sizing up a 2011 economic growth outlook that sees the US outperforming all of the G10 with the exception of Australia and Sweden according to a survey of economists polled by Bloomberg (data for New Zealand in unavailable). That outlook is expected to be reinforced by a dollop of encouraging results across a long list of high-profile economic data releases this week, starting with today’s ISM Manufacturing outcome and culminating with Friday’s Nonfarm Payrolls report. As we discussed in our outlook for 2011, “accelerating growth puts upward pressure on interest rates even in the absence of monetary tightening; indeed, while central banks may err on the side of caution amid a still-fragile global recovery, a pickup in activity will see firms begin to engage idle capital, reducing the supply of loanable funds and bidding rates higher. Assuming this occurs faster in the US, the greenback is likely to rise.”

The economic calendar looks quiet in European hours, with the final revisions of December’s German and Euro Zone Manufacturing PMI figures expected to confirm originally reported outcomes and thereby unlikely to elicit much of a reaction from currency markets. Switzerland’s SVME-PMI reading is expected to post the second consecutive increase in December, showing growth in the mountain nation’s manufacturing sector accelerated to the fastest in five months.

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