- USD crumbles in holiday-thinned market
- GBP remains the outcast of Europe
- Risk aversion increases after Bhutto assassination
- Next week: Existing home sales, FOMC minutes and NFP are key
The Greenback was crushed against most major currencies, with the EUR the primary beneficiary, as softer US data and heightened risk aversion led to heavy position liquidation. The USDâ€™s collapse was exacerbated by reduced liquidity conditions in the holidayâ€“shortened week, which was evident in the persistence of the directional price moves. Itâ€™s always difficult to gauge the durability of price developments that take place during such holiday periodsâ€”and next week will be anotherâ€”but I think itâ€™s safe to say that the USD correction higher has come to an abrupt end. Whether the USD will continue falling, however, is another question entirely.
The fundamental basis for the USD sell-off is only mildly compelling, with much of it representing â€˜old newsâ€™ that was largely priced in over the last few months. The USD selling began in earnest on the day after Christmas, with much of London and Europe out for Boxing Day/Second Day of Christmas, ostensibly on the back of disappointing holiday sales. But US holiday sales actually rose by 3.6% between Thanksgiving and Christmas versus the same year-ago period, which admittedly was the slowest rate of increase in the last three years, but an increase nonetheless. And itâ€™s not that bad considering the bigger picture of high oil prices and economic doom-and-gloom scenarios emanating from the media. My take on this is that the US consumer is still hanging in there, despite the worst prognostications.
Next came the S&P/Case-Shiller home price index, which saw home prices register a larger than expected decline of -6.1% (expected -5.7% and prior -4.9%). Is anyone still surprised when US housing data turns up weak? Ditto for sharply weaker Nov. new home sales on Friday. On Thursday, durable goods disappointed as well, but that was due to a sharp (24%) drop in defense related aircraft orders. Ex-defense orders, durable goods orders rose 1.2%, not that far off the forecasts of 2.0%. Dec. consumer confidence actually rose to 88.6 from 87.3 (expected 86.5), due to improvement in the future outlook component. On Friday, too, the Chicago PMI posted an unexpected gain to 56.6 from 52.9 (expected 51.7) on the back of strong increases in the order backlog index and the new orders index, both forward looking indicators of industrial production. Again, Iâ€™m left with the impression that despite the panoply of negatives facing the US economy (housing, sub-prime, tighter credit, oil, you name it) sentiment toward the future appears to be stabilizing. This suggests to me that the US will avoid the worst-case scenario of a recession, though it will be quite some time before the all-clear can be sounded.
The most compelling evidence of intensified US weakness came in the employment data, with initial jobless claims increasing alongside continuing claims and a drop in the Consumer Confidence labor differential into negative territory (responses indicating jobs are â€˜plentifulâ€™ minus responses that â€˜jobs are hard to getâ€™). The increases in weekly and continuing claims data is troubling, but not yet convincing that jobs are being shed on a massive scale. (When weekly claims come in above 400K, that view changes.) Weâ€™ll get a fresh update on the labor market this coming Wednesday with the ADP national employment report and on Friday with the Dec. NFP report.
In terms of market flows this past week, the overwhelming impression from inter-bank sources is that much of the USD selling/EUR buying was stop loss driven. This was certainly the case from 1.4450 up to 1.4600 and the continuation up to 1.4725 appears to be minor follow-through buying by systematic funds. To be sure, the moves of this past week have done a lot of technical damage, especially to the Head and Shoulders pattern in EUR/USD, which was invalidated on the break back over 1.4520/30 neckline, leaving the right shoulder at 1.4750 as the key trigger to further upside. As well, daily MACD readings in EUR/USD bottomed and crossed up, signaling the likely end of the EUR/USD downside correction.
Two weeks ago in this report, I wrote for the leading bullet point The USD has broken higher; contain your enthusiasm, the point being that outsized USD strength was premature at that point. This week I considered writing as the leading bullet The USD crumbles; contain your pessimism, but I decided to highlight the uncertainty surrounding the move by noting holiday illiquidity instead. The point this week is that outsized USD weakness also seems out of place and unlikely to be sustained for very long. Keep in mind that other major economies are continuing to slow alongside the US and for many of the same reasons-high oil, housing downturns, tighter credit, slowing private consumption.
Looking ahead, Iâ€™m more inclined to anticipate rangebound trading conditions for the USD against Europe through January, rather than a renewed bout of USD weakness. Next week is another holiday-interrupted week, and that poses a risk for another extreme USD decline. In holiday-thinned markets, the tendency is for either flat-line, rangebound conditions, or breakouts with persistent follow-through, as established positions are mercilessly squeezed out. This past week was certainly the latter and the USDâ€™s downside remains vulnerable as a result.
The other major development of this past week is another increase in risk aversion stemming from analyst forecasts of further massive write-downs by financial firms (certainly headlined by US firms, but not strictly so) and the tragic assassination of Pakistani opposition leader Bhutto. Normally, as risk aversion increases, JPY-crosses turn south in a hurry. True to form, all JPY-crosses (with the notable exception of EUR/JPY) are flat to lower at the end of the week. EUR/JPY, on the other hand, appears to be defying gravity amid talk that the EUR is the new safe haven currency. I suspect that sentiment will dissipate as rapidly as it arose and I look for EUR/JPY to join other JPY-crosses at lower levels. Whether itâ€™s on a precipitous fall in USD/JPY outpacing a higher EUR/USD, or outright EUR/USD selling on a failure to take out 1.4750, I canâ€™t say, but I do look for EUR/JPY to turn south soon.
Turning to the data line-up for next week, US data kicks off on New Yearâ€™s Eve Monday with existing home sales for Nov. (It will be telling if the data comes in weak and the USD fails to weaken further, though the forecast is for an unchanged MoM reading.) Wednesday sees Dec. ISM manufacturing/prices paid, Nov. construction spending, and the FOMC minutes from the Dec. 11 meeting. Thursday sees the ADP national employment report and weekly jobless/continuing claims, followed by Dec. Factory orders. Friday is the big one: Dec NFP, with +70K expected (prior +94K) and a tick up in the unemployment rate to 4.8% from 4.7%. Dec. ISM service sector gauge comes out later on Friday morning.
Eurozone data begins on Wednesday with Dec. manufacturing PMIâ€™s for individual countries and the Eurozone as a whole. German Nov. retail sales are slated for some time next week from Wednesday onwards, but no fixed date has been announced yet. Thursday sees German Dec. unemployment and Nov. Eurozone money supply. Friday sees Dec. service sector PMIâ€™s and Dec. Eurozone CPI.
The Japanese data calendar is empty.
UK data on Wednesday sees the Dec. manufacturing sector PMI. Thursday sees the Dec. construction sector PMI. Friday sees Nov. consumer credit, mortgage approvals, and the Dec. service sector PMI.
This will be my last update for the year 2007. I would like to take the opportunity to thank you for your readership during the year and offer my best wishes for good trading results in 2008. â€“BD
Disclaimer: The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.