- Despite significant day-to-day volatility, the USD is about unchanged over the first full week of the year. Covering of short USD positions from December has provided some USD support, but the underlying economic momentum suggests little potential for sustained USD gains. Employment data for December was particularly weak (record low workweek), and while USD-supportive fiscal stimulus is likely, the political process will likely push final passage into February, leading to renewed USD weakness during the weeks ahead.
- Given the collapse of EUR/GBP over the last two weeks (down over 8%) and recent setback in EUR/JPY, it is impressive that EUR/USD has not fallen further this week. EUR/USD continues to hover around its 100-day moving average (currently 1.3569), but a test above 1.40 remains likely if the ECB rate cut at its 15 January meeting is 50bp or less. The extent of weakness in cyclical data in recent weeks suggests a 50bp rate cut, so commentary about future policy will take on significant importance for the EUR.
- The EUR/GBP test of 1.00, unjustified, has failed and given way to sharp position liquidation. Combined with the smaller-than-expected BoE rate cut and the MPC’s focus on the weakness of the (trade-weighted) GBP, the GBP has rebounded toward more reasonable levels versus both the EUR and USD. A EUR/USD test above 1.40 during the early months of the year should help GBP/USD climb toward 1.60.
- Weak employment data, soft oil prices and significant exposure to the US economic downturn suggest the CAD is unlikely to perform well versus most other G10 currencies.
- While risk aversion has maintained a bid for the JPY, cyclical data appear increasingly weak, with the composite leading indicator collapsing. Given the weakness in exports and growth, verbal intervention is likely to develop if USD/JPY falls below 90, although actual intervention remains unlikely unless USD/JPY falls below 85.
- Treasuries were little changed last weak as further signs of economic weakness from a 7.2% unemployment rate and weak same-store sales were offset by issuance and the prospect of more issuance.
FX Strategy - Renewed USD weakness is likely
January 11th, 2009 · No Comments
Tags: FOREX Strategies
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