Last Week Of 2017 Sees No USD Buyers

By Kathy Lien, Managing Director of FX Strategy for BK Asset Management.

It is the last trading week of 2017 and so far we see no love for the U.S. dollar. The greenback traded lower against all of the major currencies with the exception of the euro and Swiss franc. Markets around the world were closed for Boxing Day so price action was very limited as U.S. yields ticked lower, pulling the dollar down with it.

USD/CAD was hit the hardest although in the grand scheme of themes, the move was modest with the pair’s trading range limited to 50 pips. USD/JPY drifted lower for the fourth consecutive trading day despite mostly better U.S. data. Although manufacturing activity in the Richmond region slowed, house prices increased in October and manufacturing activity in the Dallas region accelerated sharply.

Despite the passing of a sweeping tax-reform bill and a temporary funding bill to avoid a government shutdown, the dollar has struggled and while a test of 113 appears likely for USD/JPY on a technical basis, losses should be limited to 112.00/111.85 as 2018 should be a good year for USD/JPY. But in the near term, if Wednesday’s conference board report declines and pending homes fall as expected, USD/JPY will move lower and not higher. So far we’ve seen very little year-end repatriation and at this stage, there will be limited year-end flows.

Unlike the other major currencies, EUR/USD failed to participate in the anti-dollar rally. European markets were closed but investors are still reeling from Spain’s political troubles. Although most major elections took place in 2017, this does not bode well for Italy, which holds elections the middle of next year. As we’ve seen with Germany, political concerns fade quickly as investors shift their focus to growth and monetary policy. With that in mind, political developments are still worth watching as they can hamper the moves in euro as we saw on Tuesday.

Sterling, along with all 3 commodity currencies, traded higher against Tuesday's greenback. For the next week and possibly two, we do not expect new Brexit developments as the U.K. Parliament isn’t expected to debate the issue until mid January. There are no major U.K. economic reports scheduled for release until next week at which point the pace of growth and more specifically the PMI reports will be in focus.

The commodity currencies extended last week’s gains with the Australian and New Zealand dollars reaching fresh 2-month highs. These moves along with the rally in the Canadian dollar were driven exclusively by the decline in the greenback and the uptick in commodity prices. The price of oil jumped more than 2% Tuesday and is at the brink of breaking through $60 a barrel. Although we are tempted to say that these currencies are nearing a peak, on a technical basis we could see another 50- to 75-pip rally before serious resistance is met. Fundamentally, there are no major economic reports from any of the 3 commodity-producing countries this week but if U.S. data falls short of expectations, we could see commodity currencies extend their gains.