Good Data + Broker Squeeze = FX Risk Recovery

All of the major currencies traded higher on Wednesday on the back of good data and equity market gains. The U.S. economy expanded by 4% in the fourth quarter, but this increase was not enough to prevent the economy from shrinking at its fastest pace in 70 years. On a year-over-year basis, U.S. fell 3.5% in 2020, the first decline since 2009 and the sharpest since 1946. On the bright side, the U.S. economy closed the year in good shape. Despite holiday restrictions, the economy still grew in the last three months of the year, and the increases in exports, inventories and investments are a sign that businesses are planning for a recovery. Q4 also marked the second straight quarter of positive growth. and the were better than expected and, collectively, these reports drove to its strongest level in six weeks.  


Yet, the ’s gains were limited to the Japanese Yen because the rebound in stocks had a bigger influence on forex flows. The euro, sterling, the Australian and New Zealand dollars stabilized after yesterday’s decline. Equity investors were encouraged by the steps that brokers took to regain control of the speculative short-squeeze frenzy. Robinhood and interactive brokers restricted trading in stocks and options to sell only and increased the margin requirements for long and short positions. Arresting control from speculators lowers volatility and helps restore normal market activity.


Data from the Eurozone was also better than expected, with inflation in Germany doubling expectations and Eurozone economic and industrial sentiment improving. Inflation is still too low for the central bank to worry, especially with such a strong currency. In fact, the longer holds above 1.21, the more jaw-boning we are likely to hear from European Central Bank officials. Germany is next to release Q4 GDP and, unlike the U.S., growth is expected to turn negative at the end of the year. Germany went into partial shutdown in early November, so tomorrow’s report should reflect the impact of increased restrictions. This will be the first of two negative quarters that plunges Germany back into recession. No data was released from the UK, but was taken higher by the risk rally.


The commodity currencies were mixed. The was the best performer despite weaker trade data. The steadied thanks to stronger export prices. Producer prices are due for release tomorrow and is expected to be firmer. The did not participate in the recovery despite stronger earnings. Part of that may have to do with tomorrow’s GDP report. Investors are concerned that growth was weaker in November, but with and trade ticking up, the risk is to the upside for the report. 

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