Major Currencies vs. US Dollar

(week-to-date % change)

Tight correlations between most major currency pairs and theS&P 500suggest broad-based sentimenttrends remainfirmly in control of FX market price action, with theEurozone debt crisisstill the issue at the forefront(USDJPY remains an exception, with intervention fears insulating the pair from larger market themes). As wesuspected last week, this has producedUS Dollar weakness against most of the benchmark currency’s leading counterparts as seasonal flows step into the driver’s seat. More of the same is likely ahead.

The headwindsbearing down on marketconfidence are unlikely to intensify between now and January. The Eurozone crisis – while certainly unresolved – is unlikely to get materially worse as the bond rollover and auction calendars thin out while political leaders retreat from the spotlight. The downgrade of a large European sovereign remains an off-chance risk, but the staff at Fitch,Moody’sand Standard & Poor’sareprobablyjust as eager toget some rest as anyone else despite recent grumbles, meaning any serious ratings actions are likely to wait until 2012. Likewise, worries about the slowing global economy stand a relatively small chance of being materially compounded as the economic data docket turns increasingly sparse. Indeed, most of the truly headline-grabbing releases on tap this month are already out of the way.

On balance, this means traders’ attentionwill remain onbalancing their books and packing up for vacation, preferring not to force any major moves until January. Keeping in mind the ferocity of recent volatility however, it is probably fair to say that traders are jittery enough to showapreference fortaking profits on their risk-aversion betsrather than letting them tread water for the next7 trading days, opting not to run the risk of being caught on the wrong side of an unexpected headline (especially as thinning liquidity threatens to amplify the swings in price action).All told, this means the greenback will at best find itself in consolidation mode vis-à-vis the majors, though further corrective weakness seems reasonably probable.

EURO

Source: Bloomberg

BRITISH POUND

Source: Bloomberg

JAPANESE YEN

Source: Bloomberg

CANADIAN DOLLAR

Source: Bloomberg

AUSTRALIAN DOLLAR

Source: Bloomberg

NEW ZEALAND DOLLAR

Source: Bloomberg

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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