Current Market Conditions: Choppy

Majors Rangebound

All major currencies were rangebound overnight as a distinct lack of market liquidity ensured that no new ground would be broken in fx markets.  With most market participants away from their desks at the moment, volatility still remains high as illiquid conditions make for choppy price action heading into the year end.  This is a time of year that often makes for wild swings in currencies, as the mix of low liquidity and year end flows from corporates and institutions causes outsized moves.  This reality makes it important for hedgers to ensure they have a plan in place to protect themselves from these choppy market conditions, as it does not take long for things to move in this day and age.  Market orders are a great way to bid for a certain rate and also give the ability to set a worst case rate to transact at should the market trade against you.  A lack of high impact economic data for the rest of today should mean that currencies will follow equity markets for direction.
A Tale of two Dollars
It seems as if the US dollar is more than just one currency at the moment, trading in divergent directions against a host of different major currencies.  On the one hand, you have the USD versus Europe, which is very much the story of the “strong” USD, or weak EUR and GBP.  The sovereign debt crisis in the Eurozone has taken a break for the holidays but traders aren’t that soon to forget and have kept the pressure on the common currency coming into year end.  The big issue in this case still remains whether or not the EU will come through with some sort of tangible rescue fund or if it will continue to bail out troubled nations on a case by case basis.  The market is clearly looking from something proactive from the EU before they get long Euros again. Then we have the sterling, which is plumbing 4 month lows and is being brought down in tandem with their partner from the continent.  While things in the UK certainly aren’t rosy, inflation has been on the uptick and economic data has been showing signs of improvement.  Then there is the other US dollar, the one who continues to be punished in the face of huge government deficits and extraordinarily easy monetary policy.  Any currency that is positively linked to risk is on a tear against the USD as commodity prices continue to rise and the outlook for the US economy remains decidedly uncertain.  The Australian and Canadian dollars are two prime examples of this, as both trade above parity with the USD and don’t seem uncomfortable doing so any more.  The Aussie is trading near its post float high, and with China as your biggest trading partner and commodities soaring it seems as if the AUD is well supported at these levels.  The big risk here will come from China, as they still try to find ways to put the brakes on their economy that don’t involve raising the benchmark interest rate.  If China becomes aggressive in this fight, then that would deliver a big blow to the Aussie as they rely so much on China to devour their exports.
Have a great day