FX Week 5 January 2014

FX Week


Early 2014 sees returning signs of USD strength


The USD has strengthened during the first two trading days of the New Year, with optimism growing about the strength of the US economic recovery. The 10-year yield on US Treasuries reached above 3.0% at one stage last week, up from 1.80% a year ago, helped by buoyant US manufacturing data as well as strength in consumer confidence. Earlier in December the Fed announced that Quantitative Easing would begin to be tapered in January, and final Q3 GDP estimate was revised to 4.1% on an annualized basis, with signs that Q4 growth will also be quite firm. During the thin holiday period the USD/JPY rate rallied the most consistently, reaching as high as 105.50 at one point before settling back around the 105 level, which was our one-month forecast as of mid-December. At the end of last week, the USD had begun to improve against other currency pairs as well, with both EUR/USD and GBP/USD pulling back from highs of 1.3890 and 1.6605 respectively posted over the holiday period. Clearly the markets were still quite thin last week, so over interpreting such swings can be quite dangerous. Similarly, this week could also see some erratic moves, although we do believe that the firmer USD trend will continue in 2014, with even the EUR/USD beginning to participate more fully in it.

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