USD tests pre-Christmas highs – Scotiabank

The US Dollar (USD) has edged back toward its pre-Christmas highs, supported by a modest safe-haven bid following dramatic developments in Venezuela. However, momentum appears to be stalling as Asian currencies strengthen, broader markets remain calm, and investor focus shifts toward a busy week of top-tier US economic data, Scotiabank’s Chief FX Strategists Shaun Osborne and Eric Theoret report.

Venezuela shock lifts haven demand

“The USD has spent the past week grinding back towards the peaks seen just before the Christmas period, with weekend’s extraordinary developments in Venezuela giving the dollar an added boost from uncertainty/haven demand. Just how much of a lift geo-politics can give the USD remains to be seen; the DXY is already showing some signs of faltering a little above the peaks seen on December 19th and there is a fair amount to top-tier US data this week that will certainly attract more attention from traders and investors and as volumes pick up after the holidays.”

“Most attention is on geopolitics this morning but creeping gains for Asian FX may act as a restraint on USD gains in the short run and might be more meaningful for the broader USD direction in the medium term. The JPY is outperforming on the session at the margin which gives a little more credence to the ‘safe haven’ tone of FX trading at least but gains may also reflect the general strength of Asia FX, pulled along by gains in the CNY through the 7.00 level to its highest in 2 1/2 years.”

“US intentions as far as Venezuela are concerned are opaque at this point but its resource wealth is well-known. Broader market reaction is somewhat blasé. Stocks are mostly higher, bonds are a little firmer, with Gilts outperforming marginally, while crude oil is little changed. Gold is firmer. The impact of Maduro’s capture may fade unless the situation deteriorates significantly in the coming days.”