Currency Contest

USD to Extend Gains Across Board on Broad Risk Liquidation

Joel Kruger,

The US Dollar has finally come out on top following a multi-day consolidation and gains have been accelerating into the European open on Thursday. We had seen some violent corrective selling in the month of October, and November has brought with it a resumed favorable outlook for the buck. G10 currencies (Yen exception) were hit hard on Wednesday, and the higher yielding currencies were the most exposed in the negative sentiment, risk liquidation market environment. Kiwi has been one of the hardest hit on the day thus far, with the commodity currency finding some relative weakness on some softer economic data and downbeat comments from RBNZ Bollard and FinMin English. The Australian Dollar now looks like it could be on the verge of establishing back below parity and we are pleased with the price action given our short Aussie exposure via the US Dollar and Euro.

Looking ahead, the key event risk on the day comes in the form of the Bank of England rate decision, although no change is expected on asset purchases or interest rates. As such, most of the price action and direction will be heavily influenced by ongoing developments in the Eurozone, with Greece and Italy dominating headlines. A UK Guardian piece hasn’t been helping matters, after reporting that Germany and France have begun talks to consider the breakup of the Eurozone on fear of contagion to the core economy. We highly doubt there is any legitimate realty to this actually occurring, but at the same time recognize the effect such a report can have. Fear is the ultimate market mover and this type of report and rumors of reduced bank exposures, along with record wide bond yields on the peripherals, all contribute to fear of mass contagion and systemic risk that ultimately have the potential to suck any risk out of the global macro markets. It is also worth noting that geopolitical risk has crept back into play with Iran in the headlines on an IEA report that the country is looking at ways to deliver a nuclear warhead.