USD strength - enough already?

Spiking US bond yields supported greenback until ugly US Q3 final GDP revision.

How long can market continue to push the USD in low liquidity environment? GBPUSD touches 200-day moving average.

Market comment
US interest rates continued to spike higher into early US trading and are really beginning to alter the landscape for markets considering their pace of appreciation. The US 10-year benchmark is 25 bps higher than just three days ago. Rates on the 2-year are now just under 0.90%, after dipping as low as 0.65% about a month ago. This has the USD strongest against the low yielding JPY, with USDJPY now at fresh highs since October. The greenback continues to rally against the Aussie, as well, as the rate spread argument has been weakened by this latest spike in yield, and as the RBA looks to make a pause in tightening in January.

Elsewhere, the GBP is weak after the revision to the UK GDP failed to provide any upside for the pound, and GBPUSD was down trading below the 200-day moving average for the first time since May, and below 1.6000 for the first time since October. EURGBP is also finding support with the market apparently greeting Moody's downgrade by only one notch as good news for Greek debt. Greek 10-year yields fell almost 25 basis points today, even as German Bunds saw yields rising relatively sharply, as the German/Greek spread trades were undoubtedly being unwound. The strong rise in German yields and reaction in Greece is Euro supportive across the board.

Chart: GBPUSD
GBPUSD has traded through the 200-day moving average here. Time for the pair to find support? The last time the pair contended with this moving average in May, it sliced right through it as if it didn’t exist.

Japan Confidence
Bad news overnight in Japan, as the Small Business Confidence index fell rather sharply, not a good sign for an economy that needs a lot of help, outside of the quickly recovering export sector (though that recovery comes from desperately weak levels.). The eternal challenge in Japan is finding a way to stimulate domestic activity in a population with the oldest average age and highest percent of population over the age of 65 in the world. Although the index has recovered sharply from its record lows since the survey started in 1985, the 40.4 reading is not much better than the worst levels during 1998 (36.7 low) and in 2001 (38.1 low).

Looking ahead
The US GDP revision was negative once again, and this is throwing up a bit of a roadblock to further USD strength this morning and could give bonds a reason to consolidate a bit today.

The USD rally looks very impressive and in some places it really appears we have broken the down trend, but for the next couple of weeks, we have to wonder how much of the latest extension of the rally is a product of thin markets and a squeeze on vulnerable positions. The psychology and market themes seem to be changing here, but we have to wonder if the transition to the New Year might provide a sharp pivot in the action for a while, i.e., an attempt by the USD bears to mount another attack - an attack that eventually fails, but one that still results in a considerable throwback. Old and large trends rarely simply give way all in one swoop. Such a scenario gives might give rise to short term USD bearish option trade ideas.

Economic Data Highlights

• New Zealand Q3 Current Account Balance out at -1.413B vs. -2.03B expected and +0.367B in Q2
• Japan Nov. Supermarket Sales fell -8.0% YoY vs. -5.2% in Oct.
• Japan Dec. Small Business Confidence fell to 40.4 from 43.0 in Nov.
• Germany Jan. GfK Consumer Confidence fell to 3.3 vs. 3.5 expected and 3.6 for Dec.
• Switzerland Nov. Trade Balance out at 2.14B vs. 2.44B in Oct.
• Sweden Dec. Manufacturing Confidence out at -9 vs. -8 expected and -10 in Nov.
• Sweden Dec. Consumer Confidence out at 8.8 vs. 11.8 expected and 11.4 in Nov.
• Sweden Nov. PPI rose +0.9% MoM and fell -1.7% YoY vs. +0.4/+0.3% expected, respectively
• UK Q3 GDP final revision adjusted down to -0.2% QoQ and -5.1% YoY, vs. -0.1/-4.9% originally estimated, respectively
• UK Q3 Current Account out at -4.7B vs. -8.2B expected and -4.4B in Q2
• US Q3 Final GDP revision adjusted down to 2.2% vs. the most recent revision at 2.8%

Upcoming Economic Calendar Highlights

• US Dec. Richmond Fed Manufacturing Index (1500)
• US Oct. House Price Index (1500)
• US Nov. Existing Home Sales (1500)
• US Weekly API Crude Oil and Product Inventories (2130)
• New Zealand Q3 GDP (2145)
• US Weekly ABC Consumer Confidence (2200)