Daily Commentary: Dollar Up Against Most G10 Counterparts

 | Jan 02, 2014 06:24AM ET

It’s working already!
I had expected that the dollar’s weakness in late December was due largely to end-year position-closing and was not a reflection on the currency’s likely direction in 2014. We’re only a few hours into the year but so far it seems that I was right: the dollar is up against most of its G10 counterparts this morning as well as the EM currencies. The only major exception is GBP, which has gained across the board this morning. I would expect to see more USD buying as the day goes on.

The only major economic indicator out yesterday was China’s manufacturing PMI for December, which was a bit worse than expected, falling to 51.0 from 51.4 (expected: 51.2). Much of the rest of the world will announce its manufacturing PMIs for December today. Sweden’s manufacturing PMI for December is expected to fall to 55.2 from 56.0. That could prompt some profit-taking on the SEK, which has had a pretty good run recently (2nd best performing G10 currency in December) while Italy’s figure is estimated to rise modestly to 51.7 from 51.4. We also have the final manufacturing PMIs from France, Germany and Eurozone as a whole. The UK number for the month is forecast to have remained unchanged at 58.4, which could continue to support GBP. From the US, the ISM manufacturing PMI is also expected to fall to 56.9 from 57.3 in November, while the weekly jobless claims are forecast to rise to 342k from 338k. The news could put a dent in the dollar’s strong start, although as the FX market seemed to have decoupled from fundamentals in the last week or two of the year, we could have a similar period immediately following the beginning of the New Year.

No speakers during the day. A couple of Fed officials will give the first speeches of the year on Friday.

What worked in 2013 and what’s forecast to work in 2014? Last year, the Danish Krone (DKK) was the best-performing currency vs the dollar on a spot basis (+4.18%, ignoring interest paid), followed closely by the EUR (+4.17). After that came CHF (+2.52%), GBP (+1.86%) and SEK (+1.01%). NZD (-0.89%), CAD (-6.61%), NOK (-8.34%) and AUD (-14.21%) all weakened vs USD, with JPY (-17.62%) being the worst performing G10 currency. But for some of these, the interest return made up for part of the losses. EUR for example at least still has positive interest rates, while DKK has negative rates. Taking that into account, the total return on holding a long EUR/USD position rose to +4.31% while short USD/DKK fell to 4.16%, meaning EUR pushes out DKK for the best-performing spot. After that are CHF, GBP, and SEK, the same order as without interest. NZD’s negative spot return turned into a positive total return of +1.95% after taking into account the currency’s 2.87% interest rate in 2013. After that, the losers were the same order: CAD, NOK, AUD and JPY.