Why Did the Euro Fall on Weak US Data? (page 2 of 2)

USDJPY Falls to Two Year Low, More Weakness Ahead

The currencies that were punished the most by the weak US data was the Yen crosses. Fear that a slowdown would hit the global economy caused the Dow to drop 277 points to a new 9 month low. This pushed the dollar to a 2.5 year low against the Japanese Yen and the British pound to a 1.5 year low. Risk aversion is rising around the world not only because of the ripple effects of slower US growth, but also because the leading banks on Wall Street are continuing to issue bearish news. Citigroup announced the biggest loss in the bank's 196 year history, days after Merrill Lynch announced a significant write down. Earnings season has just begun and the fear is that more bad news will surface. Even continual investments by Sovereign Wealth funds fail to help the stem US equity market losses. It is too early to pick a bottom. If anything, carry trades are prime for further losses. There are a number of Japanese economic releases due for release this evening. Although they are important, their market moving potential at this point is minimal.

British Pound: Still Struggling

The British pound was one of the few currencies to actually rally against the US dollar on the belief that US rates will fall much faster than UK rates this year. Economic data from the UK this morning was stronger than expected with consumer prices rising at a faster pace than the market expected last month. Despite stronger economic data, we still believe that the British pound will continue to sell off. Employment numbers are due for release tomorrow. The employment components of service, manufacturing and construction PMI all increased in the month of December suggesting that the number of jobless claims will fall more than the -5k forecast. However the number to focus on is average earnings. Softer wage growth can easily offset a larger drop in jobless claims.

Commodity Currencies Hit by Falling Prices and Carry Trade Liquidation

The Australian, New Zealand and Canadian dollars sold off on a combination of falling commodity prices and carry trade liquidation. Gold prices continue to remain at high levels, which is why we believe that if high yielding currencies bounce tomorrow, the AUD/USD may benefit the most. There is no data from any of the commodity producing countries until Thursday evening.