• USD claims its strength overnight as oil price falls
  • EUR and GBP under pressure, yield favor USD
  • Sovereign bond yields at record lows

jan-7 graph

The USD slipped yesterday afternoon but managed to reclaim its strength overnight in Asia. The Institute of Supply Management (ISM) Services data, released yesterday morning, fell to 56.2 from 59.3 in November. This signifies that the economy may not have been able to sustain the almost 5% growth rate that we have seen in the third quarter and into the final quarter of the past year. In response, the dollar gave up some of it New Year gains during the afternoon trading hours.

Oil prices continued to tumble throughout the day. The dollar began to regain its strength and resumed its rally overnight amid a global fear of deflation. Lower oil prices put downward pressures on prices in general since oil is an integral part of most manufacturing and transportation activities. In anticipation, global sovereign bond yields have fallen toward record lows, implying that lower prices could prevail for some time.

Overnight, the Japanese 10-year government bond yield fell to 0.26 percent, and the German 10-year bond yield settled close to a record low level of 0.40 percent. In contrast, the US 10-year treasury yield fetched 2 percent, underscoring a consensus market view that the US economy and its currency are expected to outperform their peers this year.

EUR-USD continues to be under pressure as markets are expecting the European Central Bank (ECB) will announce an aggressive bond buying program later in the month. Additionally, there’s growing market chatter about a possible Greek exit from the Eurozone after the national election on January 25th. This is causing further undermining in the support for the common currency.
GBP-USD slipped more yesterday after the Bank of England reported that mortgage lending activity in the past quarter had the biggest drop since 2008. The bank survey also found that UK banks are experiencing a general slowdown in consumer lending, suggesting that the economy may not be able to count on London housing boom and rising consumer spending to continue its expansion this year.

USD-CAD climbed higher as oil prices declined further. The correlation between the loonie and oil prices has been nearly perfect during the past months. With no immediate sign of any recovery in oil price, the Canadian currency is forecasted to deteriorate further against the dollar.

For this morning, the market will be paying close attention to the release of German employment and Eurozone inflation data. Later in the day, analysts will be scouring over the FOMC Minutes to learn when the Fed plans to raise the short term interest rates.

Stay tuned.