DY: Currency Market Shifting Focus to Interest Rates on Improving US Fed Outlook
The currency markets seem to be in transition, with a move away from risk-driven trading in favor of returning to a focus on traditional fundamental catalysts as traders boost their bets on rate hikes from the US Federal Reserve.
The Euro corrected a bit higher after Friday’s sharp selloff, adding 0.3% against USD. The British Pound traded lower, giving up 0.2% against the greenback. The US Dollar dropped sharply after Abu Dhabi said it would offer a $10 billion bailout for Dubai after it came close to default over recent weeks but quickly recovered, trading little changed ahead of the opening bell in Europe. We remain short EURUSD at 1.4881 and short GBPUSD at 1.6648.
Japan’s Tankan Survey of business confidence offered a mixed outcome for large companies’ fourth-quarter outlook. Conditions in the manufacturing sector continued to improve, albeit at the slowest pace since June, but the service sector that employs over 65% of the labor force turned more pessimistic. Most worryingly, the All Industry Capex gauge that tracks business investment shrank -13.8% from the previous year, a larger drop than economists expected (-11.3%) and the largest one since records began in 1983. On balance, the report seemed to suggest that companies continue to downsize while the boost to manufacturing from global stimulus efforts dissipates, which bodes ill for employment and growth prospects in the world’s second-largest economy.
UK House Prices fell for the second consecutive month according to Righmove, an online listing of for-sale properties, shrinking -2.2% in December after dropping -1.6% in the previous month. Rightmove commercial director Miles Shipside said the recent rebound in prices, which a variety of observers have attributed to shallow supply rather than growing demand, may stall next year as property repossessions boost the number of homes on the market.
New Zealand’s economic data proved broadly positive. The REINZ Housing Price Index advanced to the highest level in nearly two years in November, although the pace of growth slowed with property values rising just 0.2% from the previous month, the least since June. The Performance of Services Index surged to 56.0, showing the sector expanded at the fastest since November 2007. The details of the report were also encouraging: sales surged 10.3% and new orders added 8.5% from the previous month, the biggest gains in at least six months. Stephen Topliss, research head of Business NZ, the firm that compiles the index, said the mood in the service sector has become “unequivocally upbeat”.
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