Greenback Finding Solid Bids on Stronger US Data As Correlations Break

http://www.dailyfx.com/forex/fundamental/daily_briefing/daily_pieces/opening_comment/2011/01/06/Greenback_Finding_Solid_Bids.html

Market participants are growing increasingly confident with the prospects for a legitimate recovery in the US economy, as economic data continues to show signs of impressive improvement. Wednesday’s blow-out ADP jobs report, and better than expected ISM non-manufacturing (4-year high) have helped to inspire the latest round of broad based USD buying, with correlations of better US data and a weaker US Dollar breaking down. It now seems as though the market is growing less confident in overseas markets and is finding comfort in a flow of funds not only into US equity markets but also into the Greenback.

Unfortunately for us, this has not helped our latest trade, with a long EUR/CAD position trading out of the money. The Canadian Dollar was actually even stronger than the US Dollar on Wednesday, with the arguably sounder economy benefiting from its proximity to the US and finding relative strength on its own merits. We still however believe that the Canadian Dollar should be exposed to future weakness at current levels on the basis of what appears to be a currency trading by longer-term cyclical highs that is also very much exposed to a potential pullback in global commodity prices as China slows in reaction to the latest tightening moves from the PBOC.

As we look at broader price action in the major currencies, EUR/USD is still locked in a multi-day consolidation, while GBP/USD also chops around. USD/JPY and USD/CHF on the other hand, have been on the move, with some major relative weakness seen across the board in both the Yen and Swiss Franc in recent trade. These currencies which had been star performers in 2010, have certainly stumbled in early 2011, and we contend that this early price action could very well set the tone for the coming months.

Looking ahead, Swiss foreign currency reserves are due at 8:00GMT, followed by Swiss CPI (-0.1% expected) at 8:15GMT. UK services PMI (52.8 expected) and official reserves are then out at 9:30GMT. A slew of Eurozone data then comes out at 10:00GMT in the form of consumer confidence (-10.2 expected), economic confidence (105.8 expected), industrial confidence (2.0 expected), retail sales (0.2% expected), business climate (1.00 expected) and services confidence (10.1 expected). Germany factory orders (1.0% expected) round things out at 11:00GMT. In North American trade, US initial jobless claims (408k expected) and continuing claims (4080k expected) are out at 13:30GMT, followed by Canada Ivey PMI (54.0 expected) at 15:00GMT. US equity futures and commodities prices trade flat thus far on the day.

Written by Joel Kruger, Technical Currency Strategist

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Queensland Floods Impact to the Australian Dollar is Seen as Modest

http://www.dailyfx.com/forex/fundamental/article/special_report/2011/01/06/Queensland_Floods_Impact_to_the_Australian_Dollar_is_Seen_as_Modest.html

“A disaster of biblical proportions.” That’s what State Treasurer Andrew Fraser called the record floods that have battered Queensland, a large state in northeast Australia. What began as a page-16 story has now made its way to the front page as economists scramble to update their forecasts for growth not only in Queensland, but for Australia as a whole.

Furthermore, because Queensland is a major exporter, the repercussions are global. Prices for many commodities have spiked higher on fears that supply will be reduced by this natural disaster. The greatest impact seems to be on coal markets. As the largest exporter of the commodity in the world, Australia is responsible for supplying coal to some of the major emerging market economies in Asia. Benchmark prices have spiked 17% since last week as markets realized the extent of the situation. Specifically, 75% of Queensland’s coal production has been halted in response to the floods.

Another commodity that has been affected is wheat. It is possible that much of the Queensland’s output has been destroyed due to the unusual weather conditions. But as the region only produces about 5% of Australia’s total output, the impact on this market is not as severe. Other markets that have been affected include that for sugar and cotton.

If there is any silver lining to the devastation of these floods, it is the boost in commodity prices. Australia is still one of the largest commodity exporters in the world and thus these higher prices will help offset the negative economic impact from the reduction in output and exports.

Another cost of these floods is the damage done to infrastructure. Queensland’s premier has said that the damage to the state’s infrastructure has been “catastrophic.” Transportation systems in particular have been badly damaged, which incidentally, could lead to reduced coal exports for some time.

But what financial markets are most concerned about is the overall impact to the Australian economy from these floods. Estimates have generally been for a reduction of 0.2% to 0.5% in 2011 GDP, or several billion dollars in total damage. This is relatively modest when you consider that the consensus estimate for growth in the Australian economy before the floods was in the neighborhood of 3.7%, well above estimates for other developed economies such as the U.S (2.6%), Euro-Zone (1.5%), UK (2%), or Canada (2.4%).

Nevertheless, the floods have given the Reserve Bank of Australia- which was already on pause- another reason to hold rates steady in the coming months. Market interest rate expectations have fallen with overnight index swaps suggesting that the central bank will only hike rates one time throughout the year. Expectations were closer to two hikes only a week ago. This has pressured the Australian Dollar, although we have seen most U.S-Dollar rivals decline over the last few days, making it difficult to separate the flood impact from the general U.S. Dollar bullishness. If we look at the Aussie versus a competing carry currency such as the Kiwi, it actually hasn’t fallen at all, suggesting that the event has only had a modest impact on forex markets.

AUD/NZD Daily Chart:

AUD/USD Daily Chart:

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