Market Wrap 17/12/07

Dollar

What happened?
Dollar rallied across the board against all majors as data was much above expectations thus giving a perfect excuse to the market, who have been looking to lock some Dollar short profits ahead of the holidays. Consumer Price Inflation recorded its largest increase in two years while a weak Dollar is providing the much needed impetus to the U.S. manufacturing sector with Industrial Production came in much higher than expected thanks to overseas demand for cheap US goods.

What next?
In this scenario it will be very hard for the Fed to cut rates aggressively thus adding to the woes of the embattled average American home owner struggling to pay its mortgage, Subprime concerns are here to stay and with holidays upon us expect sharp volatile moves in the market. Dow’s gains from the previous day were wiped out in no time and expect further correction in the equity markets.

Euro

What happened?
Like other majors the Euro tracked general Dollar strength and has fallen by over 350 pips in the last few trading days recording its biggest one day decline in over 2 years. While the market has been eagerly awaiting a break out in this pair with many gunning for the 1.50 mark constant failure in achieving that figure increased the profit taking liquidation on longs. Euro – Zone inflation came in higher than expected which is likely to keep the ECB hawkish.

What next?
Data from the Euro-Zone should continue to outperform the U.S data and bottom pickers could come in at this level to send the Euro back into range trading mode. Today’s manufacturing and services PMI data should remain steady around current levels. Its cross against the Yen could see further liquidation which could weigh in on the Euro.

Yen

What happened?
Yen pared back its recent gains against the Dollar but strengthened against its crosses which were largely due to the losses in the equity markets and the corresponding carry trade liquidation. Yen was on the back foot all day due to the lower than expected result in the Q4 Tankan surveys which fell for the first time in more than 6 months. Corporate and Consumer sentiment is uncertain given the likelihood of a recession in the U.S. economy and its high correlation with the Japanese economy.

What next?
This morning’s Tertiary Industry index rose by 1.1% in line with expectations while business confidence should remain on the low side. But the Yen should continue to strengthen against high yielders with a fair chance of large scale liquidation in carry trades

Pound

What happened?
Pound crashed by 300 pips against the Greenback, sinking towards it lowest level in two years. Its decline was based on broad based Dollar strength rather than its own fundamentals. This morning’s data will not help its case either with the under pressure housing sector showing another decline in house prices as it recorded its sharpest monthly decline since the series began in January 2002. It was also stated that house prices will not rise in 2008

What next?
All eyes will be on Bank of England’s meeting minutes to be released this week, if the statement is not as dovish as expected it could lead to a relief rally in the Pound. A paper released by BoE stated that mortgage holders were not struggling to make repayments as the interest rate increases over the last few years have been in a gradual manner .

Aussie & Kiwi

What happened?
The Aussie and the Kiwi got sold off due to the general liquidation on carry trades however they have bounced well in early Asian trading. This morning’s data showed that the number of private housing starts rose which reinforces the view that the housing market down under is on much better footing than its counterparts in U.S. and U.K. Inflationary pressures in the New Zealand are likely to keep interest rates high well into the next year.

What next?
This is a busy data week for the commodity currencies, with the RBA policy meeting minutes likely to be hawkish in line with concerns of inflationary pressures. In New Zealand Business Confidence could inch lower on high interest rates and GDP could show a decline as well.