Daily FX Market Roundup 12-26-12

Best and Worst Performing Currencies of 2012
EUR/USD Rallied Renewed
GBP: Boxing Day is a Boom for Retailers
NZD: 8 Trading Days Without a Rally
AUD: Chinese Industrial Profits Due Tonight
CAD: WTI Crude Above $90
JPY: Abe Reaffirms Threat to Change BoJ Law

Best and Worst Performing Currencies of 2012

The lack of participation in the FX market today has meant an increase in volatility for many of the major currencies. The EUR/USD for example soared at the start of the U.S. session as equities opened higher only to give up those gains when stocks turned negative. U.S. markets were open for trading, but with Europe closed for Boxing Day and most U.S. investors out for the entire week, there was very little reason for the excitement during the North American hours. A a few pieces of U.S. data were released but the rise in house prices during the month of October and the decline in manufacturing activity in the Richmond region failed to elicit any major reaction in the U.S. dollar. These tier 2 economic reports continue to be overshadowed by Fiscal Cliff anxiety. So on this quiet trading day, we want to take the opportunity to look at 2012’s best and worst performing (major) currencies. Bear in mind these rankings could change if Congress reaches a major deal on averting the Fiscal Cliff, but we don’t think its likely.


Source: Bloomberg

Surprise, surprise the WORST performing currency this year is the Japanese Yen – down almost 10% since January. Having hit a record low in the summer of 2011, USD/JPY hovered around that level at the start of 2012. Fed up with the strength of the Yen and the weakness of the economy, the Bank of Japan began to increase stimulus aggressively and their efforts proved to be far more successful than any intervention they could have staged. By raising their asset purchase fund to 76 trillion yen this year, the BoJ pumped a tremendous amount of liquidity into their economy. It didn’t had a huge impact on growth, but the prospect of continued stimulus with even more aggressive measures expected to come in the New Year has driven the Yen sharply lower and USD/JPY higher. All the while the rally in global equities and improvement in risk appetite also lent support to the currency, making 2012 the first year that USD/JPY will end higher than where it started since 2006.

The BEST performing major currency this year was the South Korean Won. Since the beginning of the year, the Won appreciated more than 7%. The country’s strong trade surplus and confidence in Asia’s fourth largest economy made overseas investors aggressive buyers of Korean stocks and bonds this year. However lately the central bank has been intervening to curb Won strength and economists have been worried that the weakness of the Yen will hurt Korea’s export sector, leading to a pullback in the Won. Among the most actively traded currencies, the New Zealand dollar is still the best performer despite the recent slide in the currency.

Looking ahead, many economists and investors believe that Yen and Won weakness are two of the most attractive opportunities in 2013.

EUR/USD Rallied Renewed

Thanks to the rally in EUR/JPY, the euro traded higher against the U.S. dollar. With European markets closed for Boxing Day, the EUR/USD’s rally was renewed by U.S. and Asian demand. 2012 hasn’t officially come to an end but with Christmas behind us, it is quickly drawing to a close. For Congress this means that the pressure to come up with a Fiscal Cliff deal is heating up and President Obama has returned to Washington to get the ball rolling. Based on the price action in the forex market today, it appears that investors remain optimistic but a large degree of their optimism is tied to the prospect of more stimulus from the Bank of Japan. USD/JPY rose to a fresh 20 month high and the gains have driven all other Yen crosses higher. This means that demand for EUR/JPY, which rose to its highest level since August 2011 is pushing the EUR/USD higher. Without the rally in USD/JPY, most of the major currencies would probably be unchanged or trading lower so Yen weakness is behind the post Christmas Day risk rally in currencies. This morning’s U.S. economic reports were mixed. According to S&P Case Shiller, house prices rose 0.66% in the month of October. The Richmond Fed index dropped to 5 from 9 for the month of December. Although U.S. markets are open for trading today, the lack of participation should make for a relatively quiet North American session unless there are fresh Fiscal Cliff headlines. No major economic reports are due for release from Europe but jobless claims, consumer confidence and new home sales are expected from the U.S. on Thursday.

GBP: Boxing Day is a Boom for Retailers

U.K. markets were also closed for Boxing Day and while this meant a quiet day for the British pound, it was an extremely busy day for retailers. According to some U.K. media, shoppers were queuing up in front of stores as early as 6am, which for Americans reminds us of Black Friday. Shops generally offer steep post Christmas Day discounting to lure in consumers and some retailers report that it has been their busiest day ever. Some surveys are reporting that consumers will spend nearly 3 billion pounds on Boxing Day, 500 million of which will be online. With retail sales growth stagnating in November, U.K. businesses really need this spur in demand to end the year on a positive note. So far, sales in Q4 have been abysmal. Consumer spending was flat last month after falling 0.7% in October. Christmas wasn’t an exceptional period for sales so Boxing Day really needs to be strong to make up for the difference. Unfortunately even if that is the case, spending will most likely decline in January as some of the momentum fades. For currency traders, this means that the outlook for the GBP/USD in the New Year is grim.

NZD: 8 Trading Days Without a Rally

It has now been 8 trading days since the NZD/USD has experienced a rally. Over the past week and a half, the New Zealand dollar has fallen from a high of 0.8475 to a low of 0.8166. While this strong reversal still leaves NZD/USD as one of the year’s best performing currency pairs, the latest reversal has many traders reconsidering their long positions. Even on this day when most of the major currencies are trading higher, NZD was unable to muster a rally. While many economists attributed the NZD/USD sell-off to U.S. Fiscal Cliff concerns and to some degree this may be true, we believe that recent data disappointments has led many traders to unwind their long positions going into year end. The RBNZ’s neutral monetary policy stance, 2.5% interest rates and a central bank with very little desire to intervene in its currency made the New Zealand dollar an extremely attractive yield and return play but now that data is weakening and investors are worried about the U.S. Fiscal Cliff, gravity has taken hold with the NZD falling the hardest. No major economic data was released from any of the 3 commodity producing countries but the Canadian dollar also failed to participate in the rally. The Australian dollar was driven slightly higher but the rally was nominal. Chinese industrial profits are due for release this evening and it will be the only piece of data that has an impact on the AUD and NZD.

JPY: Abe Reaffirms Threat to Change BoJ Law

USD/JPY soared today after Shinzo Abe was officially elected Prime Minister of Japan, making him both the first and seventh Prime Minister in the last 6 years. Right out of the gate, he made it clear that fighting deflation is their number 1 priority. Over the weekend, Abe reaffirmed his commitment to forcing the Bank of Japan to adopt a higher inflation target. On December 23rd, he said in a TV interview that if the BoJ does not accept a 2% inflation target in January, BoJ law would be changed. Previously some economists and investors expected Abe to back off the BoJ after he became Prime Minister but this renewed commitment drove the Yen sharply lower as everyone now expects the BoJ to acquiesce, making a 2% inflation target in January a done deal. According to the BoJ minutes from the November monetary policy meeting, some members of the central bank felt the “need to take decisive action without ruling out any options if necessary.” While the BoJ did not ease that month and increased asset purchases the following month “any options” could be interpreted to include a higher inflation target.

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