US equities and the dollar ended mixed on Tuesday as volumes were light across asset classes with UK financial markets closed and many US traders off on extended holiday breaks. SEK and GBP outperformed versus USD in the G10 space while NZD and AUD underperformed against the greenback with losses of about -0.24% and -0.14%, respectively.
On the data front in the NY Tuesday a.m., US December Consumer Confidence rose to 64.5 versus expected 58.9 but the positive surprise was negated by the downside revision to November's figure 56 print to 55.2. Both the Dallas and Richmond December Fed Manufacturing Indexes also disappointed with prints of 3 vs. expected 5 and -3 vs. expected 4.8, respectively.
Wednesday's Asia-Pacific economic calendar only had Japan data on tap which mostly surprised to the downside:
- Nov. Job-To-Applicant Ratio at 0.69 vs. expected 0.68
- Nov. Jobless Rate as expected at 4.5%
- Nov. Household Spending fell -3.2% from year ago vs. expected -1.2%
- Japan Nov. Core Consumer Prices fell as expected by -0.2% y/y
- Tokyo Dec. Consumer Prices ex. food, energy fell -1.1% y/y vs. expected -1.0%
- Tokyo Dec. Overall Consumer Prices fell -0.4% vs. expected -0.6%.
- Japan Nov. Retail Sales fell -2.1% m/m vs. expected -0.5%; -2.3% y/y vs. expected 0%
- Japan Nov. Industrial Output fell -2.6% m/m vs. expected -0.8%; -4% y/y vs. expected -2%
The main focus, however, remains on Europe and all eyes will be on the outcome of Italy's 3 and 10 year bond auctions on Thursday (0500ET). Yields on 10 year Italian government debt managed to close below 7% but a poorly subscribed auction may see yields hurdle back above the key 7% mark on intensified debt contagion fears. We think this may pose the most immediate threat to EUR this week and would also likely result in concurrent broad-based USD strength.
Furthermore, USD may see increased safe haven bids in the days to weeks ahead from growing socio/geo-political tensions in Asia and the Middle East. While North Korea's Kim Jong Un may well have a smooth transition, rumors of a possible military power struggle and potential interest by China have made the rounds – the Kospi is down about -1% at the moment of writing.
Threats by Iran's vice president to cut off the Strait of Hormuz, a key oil shipping route, if sanctions on Iranian oil were further implemented boosted oil prices on Tuesday but perhaps even more alarming were threats that Iran was ready to hit Israel and US interests if need be. While the likelihood of a military confrontation doesn't seem likely at this juncture, further threats from Iran could dampen risk sentiments which in turn would likely provide USD some more support.
However, most G10-USD currencies are still trading within short term consolidation ranges although price action may be setting up for a continuation of USD strength in the longer term:
- AUD/USD still ranging from 1.0140 to 1.0180 with central banks rumored to be on the bid near range lows and downside pressure likely coming from broad street expectations for softer commodity prices at the start of Q1 2012.
- NZD/USD broke below recent consolidation lows around the 0.7720 level but downside follow-through has been weak as converging support (trend-line from DEC 2011 lows & 200-hr SMA) around the 0.7680/0.7700 zone appears to be a more meaningful downside pivot; holiday range highs around 0.7750 still immediate resistance while the weekly closing break below the 100-wk sma suggests technical potential for m/t weakness.
- GBP/USD better bid relative to its G10 peers but 1.5700 still capping upside with more meaningful resistance directly above around the 1.5750/75 zone which has halted all GBP upside attempts so far for the entirety of December. Key support can be found near the 200-hr sma around 1.5610. Trend-line support from the DEC 2011 lows, also neckline for a potential H&S continuation pattern (1hr charts) comes in around the 1.5600 figure; hourly closing breaks below project a measured move objective to the key 1.5350 daily pivot.
- EUR/USD countercyclical consolidation also may be setting up potential H&S continuation pattern with the neckline coming in around 1.3050 (also the 200-hr sma); a move below would project a measured move objective towards the 2011 lows around 1.2860
- USD/JPY testing trend-line support from the 75.50/55 lows at around 77.75/80 but its daily close below the tenkan line around 77.90/95 suggests further technical downside may be in store. Initial support likely comes in around the daily kijun line around 77.60 ahead of Ichimoku cloud covers around 77.40/45.
Price action in EM FX, however, was relatively more volatile with MXN underperforming and PLN outperforming against the US Dollar. Mexico's peso lost about -1.1% against the buck, seemingly a result of institutional position squaring in riskier currencies on lingering Euro-area debt concerns.
Poland's zloty gained around +1% vs. USD on speculation its central bank & the BGK (state run Bank Gospodarstwa Krajowego) would continue intervening directly in currency markets by selling EUR and USD. The concerted intervention efforts in Poland are being taken in order to keep its public debt as a percentage of GDP under 55% to avoid automatic fiscal tightening measures.
Overall, both G10 and EM FX still seem most sensitive to Euro-area developments and will likely make Thursday's 3&10yr Italian government bond auctions the main event in this final week of trading for 2011.
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