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Waiting for US Consumer Confidence 10AM EST!
By Mike Conlon | December 29, 2009
This morning’s trading is marked by an increase in risk appetite, with the Australian dollar (AUD) and the New Zealand dollar (NZD) leading the way. AUD/USD is +1.33%, AUD/JPY +1.45%, NZD/USD is +1.74, NZD/JPY +1.86%. All this comes in anticipation of the US consumer confidence numbers, which are expected to have improved from previous readings.
Also to note is the increased feeling that the global economy is recovering as we get encouraging news from various regions and sectors of the world economy.
Two things I wanted to address:
I have written at length recently about the possibility of the US dollar’s inverse correlation to equity and commodity markets breaking down, as both the dollar and the equities seemed to be trading in tandem. And while I do think that there are definitely conditions where this can exist, I do feel that in the New Year we will see some sort of “reversion to mean”. This means that the recent break could be more of a short-term phenomena than the start of a long-term trend.
One of the reason the dollar could have strengthened is simply short covering. The trade this year has clearly been dollar down everything else up so investors could be lightening the load.
Another possibility that I haven’t mentioned before but got to thinking about was potential government involvement. We’ve all heard of the plunge protection team (PPT) in the equities market, so why not currencies as well? It seems like Larry Summers, director of the National Economic Council, has been awful quiet lately. Let’s not forget his involvement in running the Harvard Endowment into major losses under his watch. In other words, he’s no stranger to making large bets with other people’s money.
So what’s a few billion between friends? I would not be surprised at all to hear of “government market operations” used to “maintain order” in the currency markets. And while this is all speculation on my part, I wouldn’t be surprised to hear of Fed window dressing as well.
As we can see today, the Santa Claus rally is still in effect as stocks are up, yet we’re seeing more risk taking in the currency markets, particularly in the Kiwi (NZD).
Secondly, with regard to the risk trades, look for the Kiwi (NZD) to outpace the Aussie (AUD) as the vehicle of choice for the risk trade going forward. While the Aussie has been the the best performing currency of 2009, investors are betting that we’ve seen the last of the RBA rate hikes for a while and that New Zealand could be next.
Here’s a quick chart of AUD/NZD (click chart to enlarge)
So I expect to see some Kiwi strength against the Aussie in the near-term. There is support at 1.24 for this pair so it will be interesting to see what will happen if it gets there.
In the meantime, keep an eye on the USD to see if we “revert to the mean”.
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Topics: What To Look At In The Market |
December 29th, 2009 at 12:21 pm
I hope the dollar does gain its ground in 2010.