FX market outlook

FX market outlook

US dollar stays away from highs in subdued holiday trade.

The US dollar was around half a percent away from its 14-year high in holiday-thinned trading during Thursday’s Asian session.  The dollar index was just under 103 at 102.93; a safe distance away from its 103.65 high struck on Tuesday.

The euro extended its rebound versus the dollar to climb to as high as 1.0455, despite worries that Italy’s third largest bank was burning through its liquidity at a faster rate than previously thought.  The lingering question now is how exactly the Italian government plans to support the country’s struggling banks such as Monte Paschi.  Overall the euro’s rebound seemed to be more of a technical nature and the result of a small correction in the US dollar rather than any improvement in the Eurozone’s fundamental outlook or positive developments in the region’s banking sector.

In Asian economic releases, New Zealand’s GDP was slightly worse-than-expected on an annual average basis, although the quarter-on-quarter figure managed to beat expectations.  Still, New Zealand’s annual growth rate at 3.5% far exceeds the growth rates of other developed economies and strong consumer spending, homebuilding and tourism probably means that the Reserve Bank of New Zealand will leave rates at 1.75% for the foreseeable future rather than cutting them lower.  Despite losses in previous sessions, the kiwi managed to defend the 0.69 level versus the US dollar and it was last trading at 0.6915; little changed in the course of the Asian session.

Dollar / yen traded in a narrow range as a slightly risk-off sentiment in stock markets maybe forced the dollar to take a breather following major gains the previous weeks.  Dollar / yen mostly traded in the 117.40-60 range, about 1 yen away from its 118.65 high of 10 ½ months made the previous week.  Japan will be on holiday during Friday, which could lead to even thinner liquidity in yen crosses.

Looking ahead it will be a major day for US economic releases as durable goods for November, the third and final GDP estimate for the third quarter and weekly jobless claims will all be released.  At the same time (1330 GMT), Canadian inflation and retail sales will also come out.  A little later at 1500 GMT, US personal consumption and income will also come out.  The flurry of US data ahead of the Christmas holidays will doubtless keep traders busy.