Dollar Slump Accelerates

The US dollar’s slump seen in the final two weeks of 2017 is carried into today’s activity. The greenback’s sell-off extends to the emerging market currencies as well. The Hungarian forint is the strongest rising nearly 1%, ostensibly helped by the euro approaching last year’s high. However, our sense that fumes and momentum more than fresh news is pushing the dollar down is illustrated by the Korean won. It has gained nearly 0.9% today even though its manufacturing PMI fell below the 50 (49.9) boom/bust level for the first time in six months.

The same can be said for sterling. It is up 0.3% and at three-month highs, but the main economic news today was disappointing. The December manufacturing PMI eased to 56.3 from 58.2. The market had expected a smaller decline. The pullback on the news was limited to about $1.3540 after poking through $1.3565.  

The eurozone’s manufacturing PMI flash reading of 60.6 was confirmed by today’s final reading. Recall this is the strongest reading since the series began in mid-1997. New orders are near a record and jobs maintained November’s record pace. There was strong demand for investment goods, like plant and equipment. Regionally, strength was seen from Germany, Austria, Ireland, and even Greece. The French flash reading of 59.3 was shaved to 58.8 but this is still a healthy gain on top of the 57.7 November reading. Spain was a bit disappointing with a 55.8 reading. It had been expected to tick up to 56.2 from 56.1. Italy also disappointed. The market expected a small gain to 58.5 from 58.3. Instead, it fell to 57.4. However, this should be kept in context. It is the third best reading of 2017 and compares with a 53.2 reading at the end of 2016.  

The euro has approached last year’s high recorded in September near $1.2090.  The high recorded in the European morning is just shy of $1.2080.  We expected some follow-through buying, given the momentum in the second half of December.  We see the near-term risk extending toward $1.2165, which is the 50% retracement of the euro’s decline from the 2014 high near $1.40. That said, the technical indicators are stretched. Consider that the upper Bollinger Band is near $1.2035 today. It has closed the North American session above the upper Bollinger Band in the last three sessions of 2017.