USD extends post Fed rally but breaks no key resistance

On Thursday, global (currency) markets build further on the post-Fed reaction. Sentiment turned risk-on. Equities recorded impressive gains. The dollar was also in goo d shape. The trade-weighted USD nears the multi-year highs in the 89.50 area, but a real test didn’t occur yet. EUR/USD dropped to the 1.2270 area. USD/JPY rebound north of 119. Even so, the USD gains were not that spectacular given the equity gains. This might be partly due to bear steepening of the US yield curve short yields only marginally higher. A bear flatting would be more supportive for the US currency, but markets apparently join the Fed guidance that they will be very patient before actively engaging in policy normalisation.

Overnight, Asian equity markets remain in good shape, with Japan a clear outperformer and China underperforming. USD/JPY is drifting higher beyond the 119 mark, but the momentum is again not that strong. The correction top in the 121.85 is not yet within reach. The BOJ as expected kept its policy unchanged.
The commodity currencies like the AUD, the Cad, the NZD and even the Norwegian krone and the rouble are trying to regain some ground even as the oil price is back close to the correction low. EUR/CHF is trading in the 1.2045 area, preserving about halve of the initial spike after the announcement of negative CHF rates by the SNB. The decline of the CHF is a bit disappointing especially as the SNB move occurred in a risk-on context.

Later today, the calendar is thin. There are no eco data in the US. In Europe only some ‘second tier’ eco data will be published, including German consumer confidence, French production data and business confidence and Italy production data. The data might be slightly constructive, but expect no lasting impact on currency trading. So, global factors will again set the tone for currency trading.

First question is how far the post-Fed really will go. Yesterday’s price action shows that the rally has fairly strong legs. The combination of the Fed being optimistic on the economy and being patient on rate hikes looks supporting for the risk rally. At the same time, the issues from the pre-Fed era are not solved yet. Yesterday, the risk-on trade and the dollar withstood an intraday decline of oil very well, but deflation trade might still return. In Europe, the Greek crisis remains a factor of uncertainty that can spook markets again next week end the week after. So, take a cautious stance going into the last two weeks of the year. Liquidity will decline sharply over the next days but markets might still be haunted by some risk-off headlines.

Strategy. Ahead of the Fed meeting the decline of the oil price and the risk-off sentiment capped the topside of the dollar. Even in this context, we maintained the view that the 1.25/1.26 area should offer strong resistance for the euro as a ‘Russia/emerging market’ crisis should be negative for the euro in a longer term perspective. The reaction in the wake of Wednesday’s Fed meeting apparently confirms that the topside in EUR/USD is rather well protected. We hold on to that view, even if market sentiment would again turn risk off in the next two weeks. The risk of a technical EUR/USD short-squeeze at the end of the year is always possible, but we have the impression that the risk for a big/sustained squeeze has declined. USD/JPY also rebounded off the recent lows. However, this USD cross rate looks quite vulnerable to a new flaring up of the risk-off sentiment, for whatever reason. We keep a neutral bias for USD/JPY and wait for more global market stability to rebuy this USD cross rate.

Strong UK retails sending sterling higher

Yesterday, the UK November retails sales beat the consensus by an impressive margin. The consensus expected a decent 0.4 % M/M /4.4 % Y/Y growth. However, the UK consumer was in very good shape in November. Headline sales rose an impressive 1.6% M/M (6.4% Y/Y). The core reading ex auto’s was even stronger and the October figure was upwardly revised. Sterling simply couldn’t ignore this report. EUR/GBP was already under pressure due to the overall decline of EUR/USD. The pair dropped further to the 0.7850 area later in the session. Cable retested the correction lows in the 1.5540/50 area early in the session, but also jumped off this support and gained around a full big figure.

Overnight, GFK consumer confidence was reported slightly weaker than expected (-4 from -2). Sterling is marginally lower against the euro this morning. Later today, the monthly UK budget data and the CBI distributive trades will be published. We look out whether the timely CBI data will confirm the strong retail sales. If so, it can be a slightly positive for sterling, even as the impact of the CBI data is usual far less that for the ONS data.