Market Summary
In what remains a light week for FX trading activity, the dollar is strengthening again. The greenback touched a three-month high against the Japanese yen, while also advancing against most other major currencies today. Given thin economic calendars, we suspect year-end position adjustment and book balancing continue to play a big role in the currency moves. However, we also see some of the latest FX market patterns, such as the breakdown in the inverse dollar-equities relationship, as an early indication that the drivers of currency markets in 2010 will be different from those in 2009. One key theme that we see developing over the course of next year is the move away from extremely accommodative monetary policy settings by global central banks, which should be US dollar supportive. We also see the Japanese yen and the Swiss franc ‘regaining’ their status of carry trade funding currencies. The latest IMM speculative positioning data showing traders moving to a net short position on the yen suggests this theme may be starting to play out already.
Regional Highlights
Asia/Pacific
The Japanese yen is extending its recent slide, touching a three-month low against the greenback. Fiscal concerns continue to weigh on the yen after Standard & Poor’s said Japan’s credit rating could be cut if policy initiatives fail to stabilize and gradually reduce the government debt. Rising long-term US Treasury yields are also likely helping a stronger greenback against the yen, while the latest trader positioning data suggests speculators are turning bearish on the Japanese currency. Other regional currencies are faring better against the dollar: the Australian and NZ currencies are recovering from earlier losses and are little changed on the day. The South Korean won is the best performer among emerging Asian currencies after some encouraging economic data. South Korean industrial production bounced by 1.4% m/m in November with the y/y growth picking up to 17.8%. November export growth picked up to 17.3% y/y in Thailand, while manufacturing production rose 8.9% y/y.
Europe
Among the few economic data releases in the region today is the rise in the Swiss KOF leading indicator to 1.68 in December. Although the improvement from the previous month was more modest than expected, the index is still at the highest point since January 2008. In other news, the Eurozone M3 money supply fell by 0.2% y/y in November, while the South African trade deficit narrowed to 2.5B rand in November. The euro and the British pound are down against the greenback, although Scandinavian currencies are steady. The South African rand is slightly firmer, while the ruble is down over the past two days after prime minister Putin said the government intends to curb foreign capital inflows.
Americas
The US economic calendar is light today, with the only notable release being the December Chicago PMI. The index is expected to ease slightly to 55.1, still signaling an expansion in manufacturing activity. In other regional news, Chilean data was firmer than expected. Industrial production rose by 1% y/y in November and the jobless rate fell to 9.1%. Subsequently, the Chilean peso is an exception to the weaker trend in regional currencies today. The Mexican peso and the Brazilian real are both down as is the Canadian dollar, which has been struggling to hold on to the gains it made earlier this week.
