By Ilya Spivak, Currency Strategist Major Currencies vs. US Dollar (% change) 27 Dec 2010 – 31 Dec 2010 With China pulling on the brakes in a bid to tame inflation and Europe mired in a lingering debt crisis, a reinvigorated US economy amounts to the only bit of support underpinning global growth. Recent economic data is supportive of such a scenario, and a survey of economists polled by Bloomberg hints US growth will outpace that of its G10 counterparts (with the exception of Australia and Sweden) this year. Generally speaking, a pickup in economicactivity see s firms begin to engage idle capital, reducingthe supply of loanable funds and bidding interest rates higher even inthe absence of action by central banks. If this occurs faste st in the US, the greenback is likely torise . On balance, this seems to suggest that theinverse relationship between risk appetite and the US Dollar can no longer be taken for granted as had oftenbeen the case through the 2008 global meltdown and its aftermath.Indeed, the greenback may now begin to move along a paralleltrajectory with risk sentiment rather than an opposingone. This week, this apparent realignment isexpected to be reinforced by a dollop of encouraging resultsacross a long list of high-profile US economic data releases thisweek, starting with Monday’s ISMManufacturing outcome and culminating withFriday’s NonfarmPayrolls report. EURUSD : Euro FollowsNarrowing Yield Spreads Lower The Euro’s withering correlation withrisk appetite (as tracked by the MSCI World Stock Index) has beenovertaken by the pair’s link to relative borrowing costs.Indeed, we see the pair tracking lower even as the spread betweenEuropean and US 2-year yields has narrowed in favor of thegreenback. This places the currency pair at the heart of the shiftfrom risk- to fundamentals-driven price action, putting thespotlight on the US data docket and an equally busy local economiccalendar. December’s Euro Zone ConsumerPrice Index and ConsumerConfidence readings; GermanUnemployment , Factory Orders and IndustrialProduction reports; and the final revision of region-widethird-quarter Gross DomesticProduct figures are all set to cross the wires. Onbalance, the path of least resistance seems to point lower as theregion’s debt crisis continues to fester after periphery EuroZone CDS spreads – the cost of insuring against sovereigndefault – rose again last week. Source: Bloomberg GBPUSD: Pound UnderPressure as US Rates Advance As with the euro, relative yields are in focusfor GBPUSD as noted in the pair’s firming correlation withthe spread between the return on UK and US 5-year Treasuries. USeconomic growth is expected to outpace that of the UK by a fullpercentage point this year and by an average of 0.9 percent through2013, hinting the path of least resistance leads lower as yieldspreads narrow in favor of the greenback. A lower print onDecember’s ManufacturingPMI reading promises to reinforce this dynamic,particularly with the aforementioned docket of US figures expectedto underpin increasingly well-supported US performance. Source: Bloomberg USDJPY : All Eyes on USData as Yield Spreads Stay in Focus Unlike most of the majors, USDJPY has been correlated with relative borrowing costs for some time, so the focus on US economic data and its implications for near-term yield spreads is hardly surprising. The homegrown economic calendar looks uneventful but a 10-year bond auction on Thursday may prove to have some market-moving potential. Source: Bloomberg CAD , AUD,NZD : Comm BlocUniformity Fractures Having been uniformly driven by risk sentimentfor much of the past two and half years, the commodity bloccurrencies have apparent begun to diverge amid the larger shifttoward economic fundamentals underway across FX space. Indeed,USDCAD and NZDUSD now look to the spread between December 2011interest rate futures – a gauge of where traders expectrelative benchmark interest rates will be in a year – as theleading gauge guiding directional momentum. With very little on thedomestic data front in either country, this puts the US economicdocket in the spotlight, although Canadian PMI and Employment figures may prove of note. Meanwhile, AUDUSDremains primarily a reflection of risk appetite, hinting that a USdata set that proves supportive for confidence at large mayactually bolster the Aussie. Australia’s position as one ofonly two G10 countries expected to grow faster than the US thisyear bolsters the possibility of such an outcome in the near termuntil the full implications of a slowdown in China –Australia’s top export market – begin to revealthemselves. Source: Bloomberg Source: Bloomberg Source: Bloomberg For real time newsand analysis, please visit http://www.dailyfx.com/real_time_news To receive future articles by email, please contact Ilya at email@example.com
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