It has been an unusually active morning in the foreign exchange market. With equities closed for trading for Christmas tomorrow, we are witnessing position adjustments ahead of the long weekend. The euro dropped to a fresh 2 week low against the U.S. dollar, breaking its near term support of 1.3075. With France reporting extremely strong consumer spending, the euro's weakness is caused by none other than sovereign debt worries. Europe's fiscal crisis may be an old story but it is certainly not a tired one. Rating agency Fitch downgraded the credit rating of Hungary to BBB-, its lowest investment grade ranking. The Irish government also pumped more money into Allied Irish Bank, the country's second largest lender in order to help it meet the EU-IMF requirements.
From the U.S., mixed economic reports provided little relief to the currency market. Weekly jobless claims held steady at 420k, which is a healthy level, especially when accompanied by an improvement in continuing claims. Although hiring by U.S. companies has been limited, the jobless claims report indicates that layoffs have also been mild. Eventually this dynamic will evolve into a situation where few firings also translates into more hiring. Personal income rose 0.3 percent, which was slightly stronger than the market had anticipated, but the better report in November was offset by a similar downward revision in October. Personal spending fell short of expectations, rising by 0.4 percent last month, but this too was offset by an upward revision to prior numbers. The big headline disappointment was in orders for durable goods which fell 1.3 percent but excluding a drop in transportation orders, purchases of big ticket items made to last for a few years rose 2.4 percent, the largest gain since March. Although this morning's reports did not reflect weakness, it also did not reflect strength which explains why the dollar sold off against the Japanese Yen. Further losses could be possible if new home sales also fall short of expectations.
Meanwhile there was speculation that the Swiss National Bank may have intervened in the Swiss franc this morning. However, based upon the price action, the speculation is probably baseless. When the SNB intervenes, the move in EUR/CHF tends to be immediate and not gradual. Tensions on the Korean peninsula have escalated with North Korea's warning that they are "fully prepared to launch a sacred war" North Korea is clearly not in the holiday spirit and if their threats escalate, it could lead to risk aversion in the forex market.
