There’s no denying that the price action on FX this week has been erratic. The volatility seen on the dollar in the wake of the weaker than expected consumer confidence data illustrated this yesterday. The dollar initially strengthened, especially vs. sterling and the euro, but quickly turned around within the hour. The undercurrents from China have been a factor in creating more uncertainty, with stronger parallels between what is happening in China now in terms of credit, compared to the US in 2008. Previously, this would have been seen as negative for the Aussie, positive for the yen and also for the dollar.
But life is not that simple now. As we’ve talked about before, the Aussie is less correlated to China now. The yen is also trading less like a safe haven. There are also vulnerabilities in the dollar, not least from China increasing the pace of sales of US Treasuries, which in November was happening at the fastest pace for nearly two years according to the latest US Treasury data. The underlying point is that there aren’t any sure bets on the China story as there were back in 2008, when it was a case of rushing to dollar liquidity. For FX, this means greater volatility and shorter underlying trends for the time being, at least until the dynamics and implications of China become clearer and more defined.
For today, focus for sterling is with the release of further GDP data and revisions at 09:30. Thereafter, just US new home sales data is seen later in the day, which should not be a major focus for the dollar.