All of the major currencies traded higher on Wednesday on the back of good data and equity market gains. The US economy expanded by 4% in the fourth quarter but this increase was not enough to prevent the economy from shrinking at its fastest pace in 70 years. On a year over year basis, US GDP fell -3.5% in 2020, the first decline since 2009 and the sharpest since 1946. On the bright side, the US economy closed the year in good shape. Despite holiday restrictions, the economy still grew in the last 3 months of the year and the increases in exports, inventories and investments are a sign that businesses are planning for a recovery. Q4 also marked the second straight quarter of positive growth. Jobless claims and the trade balance were better than expected and collectively these reports drove USD/JPY to its strongest level in six weeks.
Yet the dollar’s gains were limited to the Japanese Yen because the rebound in stocks had a bigger influence of forex flows. Euro, sterling, the Australian and New Zealand dollars stabilized after yesterday’s decline. Equity investors were encouraged by the steps that brokers took to regain control of the speculative short squeeze frenzy. Robinhood and Interactive Brokers restricted trading in stocks and options to sell only and increased the margin requirements for long and short positions. Arresting control from speculators lowers volatility and helps restore normal market activity.
Data from the Eurozone was also better than expected with inflation in Germany doubling expectations and Eurozone economic and industrial sentiment improving. Inflation is still too low for the central bank to worry especially with such a strong currency. In fact, the longer EUR/USD holds above 1.21, the more jawboning we are likely to hear from ECB officials. Germany is next to release Q4 GDP and unlike the US, growth is expected to turn negative at the end of the year. Germany went into partial shut down in early November so tomorrow’s report should reflect the impact of increased restrictions. This will be the first of two negative quarters that plunges Germany back into recession. No data was released from the UK but sterling was taken higher by the risk rally.
The commodity currencies were mixed. The New Zealand dollar was the best performer despite weaker trade data. The Australian dollar steadied thanks to stronger export prices. Producer prices are due for release tomorrow and is expected to be firmer. The Canadian dollar did not participate in the recovery despite stronger earnings. Part of that may have to do with tomorrow’s GDP report. Investors are concerned that growth was weaker in November but with retail sales and trade ticking up, the risk is to the upside for the report.
Past performance is not indicative of future results. Trading forex carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to trade any such leveraged products you should carefully consider your investment objectives, level of experience, and risk appetite. The possibility exists that you could sustain a loss of some or all of your initial investment and therefore you should not invest money that you cannot afford to lose. You should be aware of all the risks associated with trading on margin, and seek advice from an independent financial advisor if you have any doubts.