Kathy Lien | May 17, 2013 05:26PM ET
It has been a great week to be long U.S. dollars. The greenback traded higher against all of the major currencies as investors around the world grew more attracted by the performance of U.S. equities and the rise in Treasury yields. The S&P 500 climbed to fresh record highs Friday, extending a move that has taken the index up 7.5% over the past month. During this time, 10-year U.S. Treasury yields also rose from 1.7% to 1.95%. With U.S. equities performing so well and Treasuries offering an increasing yield, the dollar attracted significant demand but just how well has the greenback performed? The dollar index is up 2% over the past month, which doesn't seem to be a lot but when looking at some of the individual currencies, we see just how far the dollar has come. The following chart shows how G10 currencies have performed over the past week and month. The Australian dollar is the worst performer and surprisingly the euro dropped the least against the greenback. The scorecard for the past month looks about the same except the EUR dropped to number two in terms of smallest losses with GBP taking the number one spot. This makes sense because the U.K. economy is in recovery mode whereas the euro zone is in recession.
USD/JPY Breaks 103
USD/JPY hit a new four-year high on the back of better than expected U.S. data and rising U.S. bond yields. While all of the Japanese Yen crosses benefitted from USD/JPY demand, the losses experienced in the AUD, NZD and CAD prevented those pairs from gaining strength against the Yen. Last night's Japanese economic reports showed continued improvements in Japan's economy but it was U.S. strength that drove the currency pair to fresh highs. As we mentioned before, USD/JPY traders need to keep an eye on U.S. yields. The following chart shows how the latest rise in U.S. yields gave USD/JPY the catalyst it needed to push higher. The Bank of Japan meets next week and with economic data showing gradual improvements and the Yen falling to fresh lows, no changes to monetary policy are expected but comments from the central bank could still affect how the currency trades.
AUD: Extends Losses As Gold Moves Lower
The Australian, New Zealand and Canadian dollars have been hit the hardest by U.S. dollar strength. The 2% drop in gold prices drove the AUD and NZD to fresh lows while the CAD shrugged off the rise in oil prices choosing instead to react to the decline in consumer prices. Traders have been selling the comm dollars mercilessly despite the lack of new data. Next week's RBA minutes will help decide whether the AUD stabilizes or makes it way down to 95 cents. Our colleague Boris Schlossberg made some good points this morning. He said "The liquidation is driven by the assumption that the RBA will now embark on an easing cycle in order to stimulate the slowing Australian economy. However, as we pointed out yesterday the Australian economy appears to be more robust and flexible than initially thought. Furthermore, one of RBA's stated goals for its recent rate cut was to drive down the value of the currency, but the market having done the brunt of that work already, Australian monetary policy makers will no have less motivation to ease in the foreseeable future. One other factor driving the Aussie lower is the slide in precious metals and that may indeed continue to be a drag on the currency especially if Gold drops through the $1300/oz. barrier. But the correlation and dependence on Gold has weakened considerably for the Australian economy and the Aussie and therefore any further downside damage is likely to be capped. Meanwhile central bank reserve diversification traders are no doubt starting to bargain hunt at these levels and the pair could begin to stabilize as the last of the liquidation flows taper off. The Aussie is now coming into long term support at the 9700 level and could see some profit taking bounce over the next few days." The takeaway is not to forget that a weaker currency is stimulate for the economy and in the case of Australia could reduce pressure on the RBA to ease again.
GBP: Big Week Ahead
With no U.K. economic data on the calendar, the British pound traded lower against the U.S. dollar and euro. This week we have seen further improvements in the U.K. economy and a GDP upgrade from the Bank of England. More economic reports are scheduled for release next week including consumer prices, retail sales, the minutes from the last BoE meeting and GDP. Each and every one of these reports has the power to cause big swings in the GBP and collectively could drive a breakout move in the currency. We still feel that more gains than weakness are likely in the GBP after recent data surprises. Considering that the last central bank meeting occurred after the April PMI numbers were released, we expect less concern about the outlook for the U.K. economy. If you recall, service, manufacturing and construction sector activity all improved last month. If we are right and the BoE sounds less concerned, sterling could recover its losses and head higher from there.
Lien, Managing Director of FX Strategy for BK Asset Management.
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