By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.
The end of year anti-dollar rally continued Wednesday with EUR/USD hitting 1.19, GBP/USD breaking through 1.34 and the AUD/USD and NZD/USD climbing to fresh 2-month highs. The Canadian dollar came within a few pips of the same milestone despite the pullback in oil prices and Canadian bond yields.
Although Wednesday morning’s U.S. economic reports were weaker, with consumer confidence falling sharply and pending home sales growth slowing, the decline in the greenback began well before the data was released. The catalyst was U.S. yields, which started the day lower, sapping the hope for an end-of-year dollar rally. Still, Wednesday's USD sell-off was modest given the nearly 6bp drop in 10-year yields. The trade balance, jobless claims and Chicago PMI reports are due on Thursday, representing the last set of U.S. data released this year. 2017 has been a difficult one for the U.S. dollar, which lost value against all of the major currencies. It is down 13% against the euro year to date and 8% against the pound. It is now ending the year just the way it started, on its back foot versus all of the major currencies.
What’s interesting about Wednesday’s rally in the EUR/USD is that it occurred under the backdrop of Spain’s political troubles, a decline in German bond yields and record long positions according to the CFTC. These factors should make it harder, not easier, for EUR/USD to rally and could explain why it is struggling to break 1.19 in a meaningful way. With that in mind, EUR/USD is trading at the upper end of its month-long range and is primed for a move higher.
Aside from the slide in the U.S. dollar, sterling was also supported by the rally in U.K. stocks. The FTSE 100 climbed to a fresh record high on light holiday trade. Mortgage approvals will be released Thursday but the report is not expected to have a significant impact on the currency. On a technical basis, GBP/USD is still range bound and while Wednesday’s move took the pair to a 1-week high, the lack of continuation undermines the significance of the attempted breakout.
The Australian and New Zealand dollars remain the best performers, climbing to fresh 2-month highs versus the greenback. Wednesday’s rally marks the fifth consecutive day of gains for both currencies with AUD/USD breaking significantly higher. Considering that no economic reports were released from either country, the subdued performance of the U.S. dollar and the strength of global equities continue to drive risk currencies like AUD and NZD upwards. The Canadian dollar also extended its gains with USD/CAD falling for the sixth trading day in a row. It has found support right above the December low of 1.2624. Oil prices declined slightly after hitting a 2.5-year high on Tuesday. Crude is poised to move higher in the coming year, which should lend support to the Canadian dollar.