•    Australian and New Zealand Dollar Dominate Through Illiquid Market Conditions
•    Euro Falls As German Inflation Reaches Eight-Month High
•    Swiss Franc Weaker Despite Consumption Rising to 14-Month High
 
US Dollar Moves Modestly Higher Despite Mediocre Consumer Confidence Data
The US Dollar finished modestly higher against the Euro, British Pound, and other major forex counterparts despite relatively mediocre economic data releases. The US Conference Board announced that Consumer Confidence saw a modest increase through the month of December, but an upward revision to November data meant that the improvement was smaller than expected. Likewise significant, the S&P Case Shiller Home Price Index fell slightly more than the consensus forecast despite a similar revision to previous data. All in all the day’s US economic data was hardly groundbreaking; the Case Shiller numbers showed that home prices remained relatively stable through October but remain down significantly on a year-over-year basis. Consumer Confidence numbers likewise largely confirmed what we already know: consumers remain very pessimistic about job and earnings prospects. Such relatively mediocre revelations hardly inspire confidence in a substantial economic recovery, but they are nonetheless early signs that the US is recovering from its worst recession since World War II.

The US Dollar rallied on the day seemingly on stop orders hunting through illiquid market conditions. As we have said and will continue to claim, traders should exercise great caution when trading through illiquid year-end periods. Price movements are even more unpredictable than usual and we can see seemingly inexplicable volatility at a moment’s notice. Tomorrow’s US economic calendar is essentially empty except for a rarely market-moving Chicago Purchasing Managers Index report. Further fireworks may come on Wednesday’s Initial Jobless Claims figures, which will shed further light on the state of the US labor market.

Australian and New Zealand Dollar Dominate Through Illiquid Market Conditions
The big surprise on the day came on substantial and consistent Australian and New Zealand Dollar strength as the currencies posted 0.9 and 1.3 percent gains against their US namesake. Yet an exactly empty economic calendar and relatively lackluster price action in global commodity markets gave little “justification” for said strength. Their impressive rallies seemed largely a function of illiquid market conditions and relatively few traders pushing each currency persistently higher. Especially with the New Zealand Dollar, actual trading volumes tend to be fairly light even through normal market conditions. The holiday trading period only exacerbates NZD and AUD illiquidity and makes “explaining” sharp price moves especially difficult. Suffice it to say, Aussie and Kiwi traders should remain on the defensive on what promises to be similarly choppy price action in the days ahead.

Euro Falls as German Inflation Reaches Eight-Month High
The Euro faltered for a second consecutive day as German consumer prices posted their highest annual gain in eight months in December on rising energy costs.  The currency was unable to hold early gains despite a rise in Italian business confidence and confirmation that the French economy expanded 0.3 percent in the third quarter.  The US Dollar resurgence has left the Euro 4.5 percent lower on a month-to-date basis, but anything can happen in the often-unpredictable final days of the year.

British Pound Breaks Three Day Winning Streak
After reaching a fresh weekly high during overnight trade, GBPUSD slipped to 1.5904 Tuesday, its lowest close since October 12.  Investors reacted cautiously to a Bank of England report that showed housing equity withdrawals fell GBP 4.9 billion in the third quarter, signaling a reluctance for households to carry debt as they face a difficult labor market and tightening credit standards.  The Pound may have some economic data in its favor this week as U.K. housing prices look to rise for a seventh month, but the currency will likely remain in a tight range this week due to light liquidity as the year comes to a close.

Swiss Franc Weaker Despite Consumption Rising to 14-Month High
The Swiss franc weakened against the greenback today despite UBS’ consumption indicator posting at the best level in fifteen months in November.  The figure has improved in the past three months, and appears to have bottomed out, signaling recovery in the landlocked nation.  Further signs of growth are expected in the weeks ahead, including the monthly KOF Swiss leading indicator, expected to increase for an eighth month.  Overall, the currency has depreciated considerably against the greenback since late November, from 0.9918 to a recent level above 1.05.  Relating closer to home, the EURCHF has shown appreciation in favor of the Swiss Franc, which could lead to weakness in trade and slower regional growth for the economy.

Written by David Rodríguez, Quantitative Strategist for DailyFX.com and James Russell
DailyFX
www.dailyfx.com

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