FOREX: Dollar Vulnerable Through Year-End, 2011 Outlook Still Bullish

Key Overnight Developments

• Swiss Franc Pulls Back from Record High, NZ Dollar Outperforms
• Australian Lending Growth Fails to Stoke RBA Rate Hike Outlook

Critical Levels

CCY	SUPPORT	RESISTANCE
EURUSD	1.3238	1.3328
GBPUSD	1.5355	1.5524

The Euro and the British Pound advanced in overnight trade, adding 0.4 and 0.3 percent against the US Dollar as the safety-linked greenback pulled back amid rising risk appetite across Asian bourses (see below). We remain short EURUSD.

Asia Session Highlights

CCY	GMT	EVENT	ACT	EXP	PREV
AUD	0:30	Private Sector Credit (MoM) (NOV)	0.3%	0.2%	0.1%
AUD	0:30	Private Sector Credit (YoY) (NOV)	3.6%	3.4%	3.3%
CNY	1:35	China MNI Business Condition Survey (DEC)	62.08	-	64.14

The Swiss Franc underperformed in overnight trade, slipping 0.3 percent on average against its top counterparts as the currency corrected after prices hit a record high in New York trade. The New Zealand Dollar proved strongest of the majors, adding as much as 0.4 percent on average as stocks advanced in Asian trade following an encouraging set of US economic data, boosting the risk-linked currency. The MSCI Asia Pacific regional benchmark equity index added 0.2 percent.

Australian Private Sector Credit added 0.3 percent in November, marking the largest increase in four months. The annualized reading proved more impressive still, rising 3.6 percent from November 2009 to post the largest yearly increase in 18 months. While the outcome underscores the fact that the central bank’s aggressive rate hike campaign over the past 14 months has yet to derail credit growth, the release failed to stoke expectations of further tightening. Indeed, a Credit Suisse gauge tracking traders’ priced-in rate increase outlook for the coming year actually fell 2bps.

Euro Session: What to Expect

CCY	GMT	EVENT	EXP	PREV	IMPACT
GBP	7:00	Nationwide House Prices s.a. (MoM) (DEC)	-0.2%	-0.3%	Medium
GBP	7:00	Nationwide House Prices n.s.a. (YoY) (DEC)	-0.3%	0.4%	Medium

A gauge of UK House Prices from the Nationwide Building Society amounts to the last bit of European event risk for the year, with expectations calling for the annualized gauge to post the first negative reading in 16 months. The outcome may not prove especially market-moving however, with traders having already sized up the state of the property market after the timelier Hometrack Ltd measure of house prices crossed the wires earlier this week.

Sizing up sentiment, the US Dollar is under fire in late Asian trade as UK and US stock index futures tick higher, pointing to firming risk appetite and promising losses for the safety-linked greenback into the end of the trading week and indeed the end of 2010. Still, the DailyFX team remains bullish on the US currency in 2011, with the latest round of weakness likely linked to year-end portfolio adjustment flows rather than substantive fundamentals.