US Dollar Benefits from Lower Trading Volumes, Final US GDP Figures Unlikely to Make an Impact

The US dollar has managed to hold on to last week’s gains, thus far, as lower trading volumes ahead of Thursday’s market closures has seen little in the way of volatility. Indeed, the most exciting price action was during the European trading session, but the US session proved to be subdued. Though we anticipate that this will remain the case throughout the week, there will be a few notable releases on Tuesday.

First, the final round of US GDP readings for the third quarter is not expected to show any revisions upon release at 8:30 ET. Indeed, annualized GDP is forecasted to go unchanged at -0.5 percent, while personal consumption is expected to hold at -3.7 percent. It will likely take a surprisingly low result to illicit any sort of reaction from the markets, as traders are already well aware that economic conditions in the US remain dismal. The Commerce Department's measure of new home sales is expected to fall 4.2% to 415K, the lowest since early 1991, while the National Association of Realtors index of existing home sales is forecasted to fall by 1.0% to 4.93M, holding near the lowest level since record keeping began in 1999. Overall, conditions in the housing sector remain weak, and given recessionary factors such as rising unemployment and contracting consumption, home sales are likely to continue falling in coming months.

New Zealand Dollar Could Pull Back as Q3 GDP is Expected to Drop by Most Since 2000

The New Zealand dollar could come under bearish pressures this evening as GDP reports are anticipated to show that the New Zealand economy contracted for the third straight quarter during Q3, at a rate of -0.5 percent. This is anticipated to be the sharpest decline since Q2 2000 and worst recession since late 1997 - early 1998, as consumer spending falters and the housing sector slows. As it stand, Credit Suisse overnight index swaps are close to pricing in a 75bp cut by the Reserve Bank of New Zealand (RBNZ) on January 29, but if New Zealand GDP falls more than expected, speculation of aggressive rate cuts could rise and weigh on the New Zealand dollar. Near-term support rests at the 38.2 percent retracement level of 0.5205 - 0.6038 at 0.5721, and a break below there and the psychologically important 0.5700 mark is likely to see NZD/USD target the 50 percent retracement level at 0.5622.

Euro Holds Near Record Highs Versus British Pound, Both Remain Under Pressure Against US Dollar

The euro continues to trade near record highs versus the British pound, as the pair has done little but consolidate below 0.9500 - 0.9550. However, the individual currencies have not started the week off on a strong note versus the US dollar, as both tumbled during the European trading session, leaving EUR/USD to consolidate near 1.3950 while GBP/USD traded in a range of approximately 1.4700 - 1.4850. The moves came following the release of disappointing industrial new orders for the Euro-zone, which fell by a record 15.1 percent in October from a year earlier. Looking ahead to the next 24 hours, the UK's Office for National Statistics is anticipated to confirm that GDP contracted by 0.5 percent during Q3, following a total stagnation during Q2, signaling that the economy has tipped into recession for the first time since 1990-1991. The collapse will be the result of the sharpest drop in consumer spending since 1995 and a decline in investment as the financial crisis took its toll. The Bank of England has already cut rates to 2.00%, the lowest since 1951, and is anticipated to reduce the Bank Rate by another 50bps in January. The British pound is only likely to respond to the figures if GDP falls more than expected, though downside risks linger for the currency in light of interest rate expectations for the country.

Japanese Yen Strength Has Crippled Trade, as Exports Plunged 26.7% in November

The Japanese yen slipped lower on Sunday and Monday following news that Japan’s exports plunged at a record annual pace in November. A further breakdown shows that exports to Asia fell by the most since 1986 due to the combination of a rapid appreciation in the Japanese yen along with slowing global growth. Furthermore, the trade balance fell negative for the second straight month for the first time since 1980, as a 14.4 percent drop in imports was offset by a 26.7 percent decline in exports. According to the Bank of Japan’s Monthly Report for December, the central bank is highly concerned about these developments, and if the Japanese yen continues to strengthen, there is little doubt the government will step in to intervene in the currency markets.

Terri Belkas is a Currency Strategist at FXCM.