Major Currencies vs. US Dollar (% change)
27 Dec 2010 – 31 Dec 2010
With China pulling on the brakes in a bid to tame inflation and Europe mired in a lingering debt crisis, a reinvigorated US economy amounts to the only bit of support underpinning global growth. Recent economic data is supportive of such a scenario, and a survey of economists polled by Bloomberg hints US growth will outpace that of its G10 counterparts (with the exception of Australia and Sweden) this year.
Generally speaking, a pickup in economic activity sees firms begin to engage idle capital, reducing the supply of loanable funds and bidding interest rates higher even in the absence of action by central banks.If this occurs fastest in the US, the greenback is likely to rise.
On balance, this seems to suggest that the inverse relationship between risk appetite and the US Dollar can no longer be taken for granted as had often been the case through the 2008 global meltdown and its aftermath. Indeed, the greenback may now begin to move along a parallel trajectory with risk sentiment rather than an opposing one.
This week, this apparent realignment is expected to be reinforced by a dollop of encouraging results across a long list of high-profile US economic data releases this week, starting with Monday’s ISM Manufacturing outcome and culminating with Friday’s Nonfarm Payrolls report.
EURUSD: Euro Follows Narrowing Yield Spreads Lower
The Euro’s withering correlation with risk appetite (as tracked by the MSCI World Stock Index) has been overtaken by the pair’s link to relative borrowing costs. Indeed, we see the pair tracking lower even as the spread between European and US 2-year yields has narrowed in favor of the greenback. This places the currency pair at the heart of the shift from risk- to fundamentals-driven price action, putting the spotlight on the US data docket and an equally busy local economic calendar. December’s Euro Zone Consumer Price Index and Consumer Confidence readings; German Unemployment, Factory Orders and Industrial Production reports; and the final revision of region-wide third-quarter Gross Domestic Product figures are all set to cross the wires. On balance, the path of least resistance seems to point lower as the region’s debt crisis continues to fester after periphery Euro Zone CDS spreads – the cost of insuring against sovereign default – rose again last week.
Source: Bloomberg
GBPUSD: Pound Under Pressure as US Rates Advance
As with the euro, relative yields are in focus for GBPUSD as noted in the pair’s firming correlation with the spread between the return on UK and US 5-year Treasuries. US economic growth is expected to outpace that of the UK by a full percentage point this year and by an average of 0.9 percent through 2013, hinting the path of least resistance leads lower as yield spreads narrow in favor of the greenback. A lower print on December’s Manufacturing PMI reading promises to reinforce this dynamic, particularly with the aforementioned docket of US figures expected to underpin increasingly well-supported US performance.
Source: Bloomberg
USDJPY: All Eyes on US Data as Yield Spreads Stay in Focus
Unlike most of the majors, USDJPY has been correlated with relative borrowing costs for some time, so the focus on US economic data and its implications for near-term yield spreads is hardly surprising. The homegrown economic calendar looks uneventful but a 10-year bond auction on Thursday may prove to have some market-moving potential.
Source: Bloomberg
CAD, AUD, NZD: Comm Bloc Uniformity Fractures
Having been uniformly driven by risk sentiment for much of the past two and half years, the commodity bloc currencies have apparent begun to diverge amid the larger shift toward economic fundamentals underway across FX space. Indeed, USDCAD and NZDUSD now look to the spread between December 2011 interest rate futures – a gauge of where traders expect relative benchmark interest rates will be in a year – as the leading gauge guiding directional momentum. With very little on the domestic data front in either country, this puts the US economic docket in the spotlight, although Canadian PMI and Employment figures may prove of note. Meanwhile, AUDUSD remains primarily a reflection of risk appetite, hinting that a US data set that proves supportive for confidence at large may actually bolster the Aussie. Australia’s position as one of only two G10 countries expected to grow faster than the US this year bolsters the possibility of such an outcome in the near term until the full implications of a slowdown in China – Australia’s top export market – begin to reveal themselves.
Source: Bloomberg
Source: Bloomberg
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