The themes that started the year continue to dominate in the second trading day of 2011. The Aussie is weak as flooding continues to plague Queensland, which is also impacting sentiment to the Kiwi dollar. Meanwhile the Cad, euro and dollar are all strong.
The dollar was pushed higher by a rise in Treasury yields yesterday after a strong ISM manufacturing reading at the end of the year, which reinforced a dominant market theme of US economic outperformance this year. This rise in Treasury yields has had a greater impact on USDJPY than other dollar crosses. This pair is extremely sensitive to movements in US yields and USDJPY is currently holding above the 82.00 level.
The euro and the pound are both showing some strength against the greenback. The rise in the euro has coincided with strength in equity markets. For now sovereign debt fears have been sidelined. A meeting between Spanish and Chinese officials today and pledges by Beijing to purchase the government debt of Portugal and Spain could boost sentiment toward the single currency. Europe's peripheral nations desperately need to find buyers for their debt to help push down the cost of their borrowings, so China's desire to diversify its reserves out of dollar-denominated assets could help to save the Eurozone.
EURUSD also received a boost from stronger than anticipated inflation in December. The Eurozone inflation estimate rose to 2.2% from 1.9% in November. This is above the ECB's 2% target rate, and could fuel some of the ECB's hawkish members who have called for a rate rise. The euro spiked to 1.3400 versus the dollar immediately after the news. However, EURGBP remains on the back-foot.
The pound is also trading with a spring in its step after a stronger than expected set of data released during the European session. The PMI manufacturing survey for December smashed investors' expectations and rose to 58.3, beating the 58.0 reached in November. This is the highest reading since records began and suggests that the manufacturing sector could continue to help underpin the UK's economic recovery even as the 2.5 per cent increase in VAT, which takes effect today, beats down on the consumer. Mortgage approvals were also better than expected and a measure of M4 money supply closely watched by the Bank of England also rose to its highest level since March 2010, in November.
The Aussie dollar remains on the back-foot as flooding continues to hit Queensland. But crucially it has remained above parity, even as the flooding has escalated and hit exports of the area's coal-based commodities. It is currently trading at 1.0070-90, down from Friday's 1.0250 highs. If AUDUSD can manage to cling on above parity then it bodes well for further gains in the Aussie. However, watch out for any dovish rhetoric from the RBA as this could hurt the AUD.
Equities are having another good start to the European session and encouragingly volumes have also picked up as investors return from the holiday break. Risk was given a boost from strong ISM data out of the US. The main piece of data out later today is the FOMC minutes from December's meeting. The Fed is likely to acknowledge the pick-up in the economic data since its November meeting (when it announced an extension of QE) but it is likely to continue with its programme of QE2 due to continued weakness in the labour market.
Source: ActionForex.Com
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