Currency market trying to set off a few fireworks to end the decade as JPY tanks and GBP rallies.
Will the roll-over to a new calendar year prove an important pivot point?
The USD found a bit of fundamental resistance to its strengthening move as the large 5-year treasury auction on Tuesday and 7-year auction on Wednesday went very smoothly, while foreign demand was noted as weaker than average. This development finally managed to stabilize US bond yields, which led to a reasonable consolidation in the recent USD strength. German yields have continued to rise over the last couple of days, thus helping the EURUSD to find an area of consolidation for now.
The sharp moves of yesterday and today in the JPY and GBP crosses are to be taken with a grain of salt, as some of the strength of the action may be end-of-month/end of year fixing effects . Let's wait to see whether the roll-over to a new calendar year will provide a pivot in the action. In the JPY's case, it may seem a bit surprising that the strong US bond auctions haven't provided more relief for the JPY. But if we look at the front end of the yield curve spread, we actually see further fuel for the USDJPY rally. The relatively strong US data of late, including last week's strong weekly claims, the November durable goods order report, and the strong December Chicago PMI and another positive weekly claims report out today continue to push US . The US/Japanese two-year spread is now at a chunky 96+ bps, a huge difference from the sub-45 bp region this spread has rallied from since the beginning of December. This spread only reached above 100 bps on two trading days in 2009, and USDJPY was trading closer to 96 at the time, relative the current 92.50.
It's more difficult to find a source of the GBP rally, but it is certainly worth noting that EURGBP is again trading down close to the 200-day moving average, which has held it twice over he last couple of months. A break and close below this average in the New Year could send the pair much further south toward the 0.8400-area lows of 2009.
Chart: EURGBP
EURGBP again approaching the key flatline support area and 200-day moving average, which has twice held it in recent months.
EURGBP again approaching the key flatline support area and 200-day moving average, which has twice held it in recent months.
Looking ahead
Beware the roll-over to the new calendar year! The late USD rally has many new converts as we enter the New Year, and it will be interesting to see if the greenback can continue its winning ways. Much of the short USD positioning was wiped out by December's moves, so we will be starting the year on a more neutral footing. It appears that the focus will continue to rest on rate differentials for the USD and the new JPY carry trade as we test the waters of a new decade.
Beware the roll-over to the new calendar year! The late USD rally has many new converts as we enter the New Year, and it will be interesting to see if the greenback can continue its winning ways. Much of the short USD positioning was wiped out by December's moves, so we will be starting the year on a more neutral footing. It appears that the focus will continue to rest on rate differentials for the USD and the new JPY carry trade as we test the waters of a new decade.
And the first week of the New Year will provide plenty of event risks, with all of the usual big numbers to start the month, like the US ISMs and employment report. Also up next week, we have the BoE out with its latest rate and QE-target setting meeting.
All the best wishes to you and yours for 2010!
Economic Data Highlights
- UK Dec. Nationwide House Prices rose +0.4% MoM and +5.9% YoY vs. +0.3/+5.6% expected, respectively
- US Weekly Initial Jobless Claims out at 432k vs. 460k expected and 454k last week
- US Weekly Continuing Claims out at 4981k vs. 5100k expected and 5038k last week
Upcoming Economic Calendar Highlights
- US Dec. NAPM-Milwaukee (1500)
- China Dec. Manufacturing PMI (0100)
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