from the BBH Currency Strategy Team
The US dollar is softer on the last trading day of the year with position squaring likely the main driver. With the economic calendar light, the euro traded in narrow ranges throughout most of the session until early European interest saw it pop up to $1.3385 from $1.3300. Sterling consolidated after modest buying interest lost support following the better-than-expected Nationwide house price report, topping out around $1.553. Meanwhile, EUR/CHF benefited from euro buying interest and recovered the 1.2500 clip, but USD/CHF remained heavy after trading at new record lows of 0.9339. Elsewhere, the yen was stable, remaining close to JPY81.30, while the antipodean’s were mixed with the Australian dollar trailing gains in the New Zealand dollar, which held steady above NZ$0.770.
UK December Nationwide house prices came in better-than-expected, rising +0.4% m/m and 0.4% y/y, and posted their first gains in seven months. The consensus was for a modest decline of -0.2% m/m and -0.3% y/y. Nationwide’s report of a house-price gain contrasts with other data that show values are declining as the prospect of 330,000 public-sector jobs as the government’s austerity measures kick in may stymie demand for housing. Nonetheless, U.K. house prices are now levelling out, after an impressive rebound in the second half of 2009 and early 2010. But overall,the outlook for sharp fiscal tightening, limited credit availability, continued soft wage growth, weak consumer confidence and high unemployment, are likely to place a lid on house prices gains in the months ahead. As such, the weakness in housing, coupled with the moderation in consumption in the wake of the government’s austerity measures, are two themes that are likely to weigh on sterling in 2011 as UK growth lags behind the US.
South Korea December CPI rose to +0.6% m/m from -0.6% and to +3.5% y/y from +3.3% y/y in November, beating consensus expectations of +0.3% m/m and +3.2% y/y. It left annual average CPI at +2.9% y/y in 2010, after +2.8% y/y in 2009. While December CPI remained off from October 20-month high of +4.1% y/y, the spike in food prices along with the higher than expected inflation likely point to continued tightening by the Bank of Korea . The central bank paused at its policy meeting on December 9, holding its interest rate steady at 2.50%, after having begun the process of normalizing rates from a record low 2%. On the whole, it is expected to continue hiking gradually to keep ahead of price pressures as economic expansion continues.
Peripheral bond yields are marginally higher with the 10-year Spanish yields up 3bp followed by a 2bp increase in Portuguese yields. German 10-year yields are down 1bp but overall this years performance of German bunds was the best since 2008 as the fiscal crisis in the periphery increased demand for the safest fixed-income assets in the region. Meanwhile, with Portugal expected to refinance between EUR20bln and EUR25bln next year (with nearly half front-loaded to the first quarter of 2011), the demand for safe haven assets is unlikely to wane anytime soon. Indeed, continued tensions in the euro-zone periphery will be a major theme in early 2011 as the new supply of bonds from Spain and Portugal and therefore the markets demand for these securities are likely to be the main driver of euro weakness in the first half of the new year.
Global equities are mixed on the last day of trading with European stocks soft while Asian equities closed the year on a solid footing. US index futures point to a weaker opening.
There are no data releases in the US this morning but tonight China reports its December PMI manufacturing index, which is expected to drop to 55.0 from 55.2. In addition, South Korea releases it December trade figures.
Happy New Year!