There was a quiet start for the current week, with most of the action expected to come towards the end of the week. Yesterday evening we had the Fed’s FOMC interest rate decision and GDP figures from the US. We are still waiting for some major impact data, namely we have payrolls data expected tomorrow. Before I move on to have a look at this week’s major happenings, as we close this first month of 2013, let’s look into the major trends that have so far marked the currency markets this year.

Among the major currencies the JPY tops the list of the biggest loser so far this year. According to the Bloomberg Correlation-Weighted Currency Index, the JPY sheds around -4.40 per cent across a basket of major currencies. A change in government in Japan and some important policy changes coming from the BoJ have contributed to the JPY’s weakness – a weakness welcomed by Japanese export-led businesses.
The JPY was not the only trendsetter however. EUR/CHF had finally distanced itself significantly from the 1.20 floor, as it breached (and so far maintained) 1.24 levels. The Swiss franc in fact loses - 0.76 per cent YTD; on January 18, the EUR/CHF peaked to highs of 1.2569, levels last seen in May 2011.
Yet in reality after the JPY’s hefty losses so far this year, it is Sterling that attracts the largest sell-offs. On the Bloomberg Correlation-Weighted Currency Index it sheds -3.36 per cent across a basket of major currencies.
After gaining around +2.74 per cent against the euro throughout 2012, the GBP has already shed -5.20 per cent ahead of month’s end in this first month alone. Sterling starts to lose its shine as the risks of a eurozone breakdown start to fade away, and the feeling that the worse might be over prevails. While risks were elevated for the eurozone the GBP enjoyed some support on the back of safety flows, as the United Kingdom stood out as a compact fiscal entity when compared to the group of troubled eurozone nations. As these eurozone concerns continue to fade away the game changes for the GBP.
Now that the ECB managed to eradicate the gloomiest outcomes (at least from investors’ minds), the GBP is losing out on these eurozone-motivated safety flows. But other concerns also weigh on the UK’s outlook.
The UK economy contracted by -0.3 per cent and -0.5 per cent respectively in the first two quarters of 2012.
The third quarter’s stronger than expected +1 per cent was well received, but another -0.1 per cent reading for the advanced reading of the fourth quarter starts to raise concerns that the UK’s economic growth may be heading south again. The EUR/USD started the week trading within a relatively tight range, throughout Monday’s session the currency pair only managed a 50 pip range, but the pair nonetheless embraced fresh highs on Tuesday when it hit session highs of 1.3490. Price moves higher are capped at this 50 per cent retracement of the move lower seen from May 2011 to July 2012.
The EUR/USD has traded in the range of 1.3414–1.3490 in the former part of this week. Expect 1.3538–1.3615 to cap upside moves while 1.3323-1.3187 should support price moves lower.
Last Tuesday US consumer confidence for January disappointed expectations of 64.0 when it came out at 58.6.
Early into the Tuesday session, we had some better than expected data from Australia and New Zealand. The Australian Business Confidence Index for December rose to +3 from the previous -9, a significant swing in confidence that also marked the best improvement since the end of 2001. Even in the neighbouring New Zealand we had stronger than expected trade balance where the trade deficit swung into positive for December.
The data helped the AUD/USD recover the losses made throughout the Friday and Monday session. At the time of writing, the Aussie regained the lead and pushed to session highs of 1.04650.