Jump in Bond Yield Sends Dollar Higher - Euro and Pound Still Looking Good - Carry Trades Fuel Gains in NZDJPY
The US dollar broke higher today after the University of Michigan consumer confidence report came out stronger than expected and bond yields skyrocketed. Although the UMich report may have partially contributed to the rise in yields, the size of the move in yields (which was big) compared to the size of the surprise in the confidence report (which was small) suggests that most of the move was related to pre-holiday profit taking. Ten year bond yields have increased by 7bp to 4.62 percent. Aside from the confidence report, most of the other economic data released this morning was dollar negative. Personal income grew by 0.3 percent in the month of November while personal spending grew by 0.6 percent, both of which were softer than expected. The core PCE deflator, which is the Fed's preferred inflation measure was flat, indicating subdued inflation pressures. Durable goods increased more than expected on a headline level (1.9 percent), but excluding transportation, orders actually dropped by 1.1 percent. The strength in the headline number came predominately from orders for commercial aircraft and military equipment. Beneath the surface, spending for items made to last longer than 3 years is lackluster at best. Aside from inflation, most of economic data that was released this past week has been dollar negative, yet the dollar has held on strong because with inflation still at lofty levels, the Federal Reserve does not have a compelling enough reason yet to consider lowering interest rates. Markets around the world are closed on Monday for Christmas with many countries remaining closed on Tuesday as well. There is no US economic data due for release until Wednesday.
Euro and Swiss Franc
After having rallied very strongly in the last week of November, the Euro has spent most of December giving back those gains. Even though this morning's economic data was mixed, the Eurozone economy is performing well for the most part and the European Central bank's commitment towards normalizing interest rates suggests that the currency may have more upside potential. German business confidence hit a 16 year high this past week while consumer prices jumped 0.8 percent in the month of December. Although this is slightly weaker than the market was expecting, it still indicates that inflation is growing. ECB Weber warned this morning that the central bank is still watching inflation risks closely and will act if needed. Unfortunately we are already beginning to see signs of the strong Euro hurting the region. The Eurozone current account surplus dropped from 1.1 billion to zero in the month of October. The French economy remains weak, although there are signs of improvements as consumer spending jumped by 0.9 percent in the month of November. Business confidence did not fare as well with the index dropping from 108 to 106 in the month of December. Like the US, the Eurozone and Swiss economic calendar are completely empty until Wednesday since most European markets are closed on both Monday and Tuesday.
Since coming within an arms length of the 1.9850 high at the beginning of the month, the British pound has quietly consolidated against the US dollar. The breakout that we saw around Thanksgiving was very significant and since then, most UK and US economic have confirmed that the higher probability continuation move is upwards rather than downwards. Both the October index of services and the Q3 productivity report printed stronger than expected today but the housing market is the real pride of the UK economy. Next week, the limited data that is due for release is nearly all related to housing. As long as the sector remains strong, UK consumer spending should continue to grow which will support the positive outlook for the British pound.
The Japanese Yen has been the weakest performing currency pair this month as it consistently lost value against the majors. It seems like each day more losses are incurred and the price action today was no exception. The minutes from the November Bank of Japan monetary policy meeting released last night revealed no surprises. The decision to leave interest rates unchanged was unanimous although one member said that the central bank should not hesitate to raise rates should inflation increase or the economy improve. Japan is the only country releasing economic data Monday night. We are expecting consumer prices, unemployment and household spending, all of which are important releases. Some traders believe that the Bank of Japan will deliver another interest rate hike as early as January. Although this seems unlikely, Monday's data will play a key role in clarifying the monetary policy outlook.
Commodity Currencies (CAD, AUD, NZD)
The New Zealand dollar has completely decoupled from the other commodity currencies this past week, as the currency races to a fresh year to date high while the Australian and Canadian dollars end the day lower. The 0.9 percent rise in NZD/JPY indicates that the NZD/USD's rise has been mostly spurred by carry trade demand. In fact, all of the yen crosses are higher. The Australian dollar on the other hand has shrugged off the stronger October leading indicators print as the market debates whether to place greater weight on the recent GDP downgrade or today's firmer economic data. The Canadian dollar is simply extending its losses after the sharp disappointments that we saw in Canadian data earlier this week, which includes a flat GDP reading and a big drop in retail sales.