Markets wind down

Currencies Direct December 23rd 2009 - 2 minute read


Markets get more and more illiquid and technicals become more and more relevant. To that end, Euro/Dollar remains the driver for forex markets and the target is very much the 200 day moving average level of just below 1.4200. Given the current penchant for buying Dollars, this looks a better than evens bet today. The turn in the dollar to date comes from a better relative economic performance than other majors, rather than any concern that the global recovery will derailed. As such, we should not necessarily be seeing weakness in high yield commodity and emerging currencies. Certainly the renewed strength in the dollar may be discouraging funding carry trades out of the dollar, and renewing the case for funding out of the JPY or even the EUR, but it suggests a broad carry trade unwind is unlikely to last. The recent improvement in the US Dollar against other major currencies reflects the relative rise in US bond yields. The EUR/USD has slid in December as the Euro yield advantage on 2-year government bonds has slipped from 0.62% in late Nov to 0.28% today – a move that MUST reverse going into 2010.Going back to recent US economic performance, the reported strength in the existing home sales supports the view that things are on the up. December has been a pretty good month for the US on the whole. Although recent manufacturing indicators have proved mixed, November payrolls were a big boost for sentiment. The significant trade balance improvement reported for October and strong Nov retail sales were also confidence boosts. It all leaves the market wanting Dollars as we career towards the end of the year. 2010 should prove a different kettle of fish however and I still look for Euro/Dollar to be nearer 1.50 than 1.40 by the end of the 1st Qtr.

Sterling had a good news / bad news day yesterday. The GDP figure was revised better but not by as much as had been hoped whilst the current account was reported to be much better than had been anticipated. Perhaps the weaker Sterling is at last paying dividends in the performance of the UK’s export trade.

Fitch however, did caution over the longevity of the AAA sovereign rating enjoyed by the majority of the current holders. They pointed out the “unpleasant fiscal arithmetic” needing to be faced by many states across the Old World and tagged Britain and France for special mention, stating that their debt to GDP ratios will both likely exceed 90% by 2011 , higher than the 80% level breeched by Japan earlier in this decade which triggered their own loss of the AAA status.

Only other data of importance was a slightly worse than expected revision to the New Zealand 3rd qtr GDP data which knocked the recent shine off the Kiwi Dollar. This does however just look like an end of year correction to the currency’s recent appreciation and a return of strength in the New Year appears extremely likely.

The contents of this report are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. Currencies Direct cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

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