The day before Christmas is always a quiet one in the financial markets because it is already Christmas Eve in Asia and in Europe, everyone is rushing home to spend time with family. The small amount of U.S. traders who are obliged to work today are looking forward to a shortened day with equity and bond markets closing by 1pm ET. Most FX brokers are ending trade after the European close at noon and trading around the world will be halted until Thursday. While U.S. data has been released over the past 48 hours, the reaction in the dollar is limited by the lack participation in the forex market. Nonetheless the dollar is trading higher against all of the major currencies this morning with the exception for the euro.
Today’s U.S. economic reports were mixed but the underlying story of recovery in the U.S. economy remains the same. Durable goods orders rose 3.5% from an upwardly revised 0.7% increase the previous month. Excluding transportation orders, durables rose 1.2% with last month’s reading revised up from -0.1% to 0.7%. While orders for goods made to last for more than a few years can be volatile, the surge in durables ex transportation and the largest rise in non-defense and ex air capital goods since January means that GDP growth this quarter could be very strong. The Richmond Fed index also held steady at 13 when economists had been looking for a decline. The rise in manufacturing activity supports the Federal Reserve’s decision to taper last week. Meanwhile new home sales dropped 2.1% in November after rising a downwardly revised 17.6% the previous month. The decline was not surprising considering that sales hit a 5 year high in October. The median price of a home sold also increased and is a sign of recovery for the housing market.
2014 will be the year for America to shine. For the past decade, the growth story has been in Asia and more specifically China but in the coming year, faster growth in the U.S. and slower growth in China will make U.S. assets more attractive to global investors. At 7%, China’s expected 2014 growth rate will exceed the U.S.’ 3% rate but U.S. growth is accelerating while Chinese growth is slowing. Less fiscal drag and a more solid cyclical recovery next year will give banks the confidence to lend and households the willingness to borrow. Earlier this month, U.S. Senators passed a budget deal that would avoid another government shutdown in mid January. The debt ceiling debate is still an uncertainty but with the midterm elections looming few politicians in Washington have the appetite for another fiscal fight. So as the Federal Reserve reduces its bond purchases, interest rates in the U.S. will rise, attracting foreign investment out of Asian economies that are vulnerable to weaker Chinese growth. More foreign investment will be positive for the dollar.