Markets were dominated by year-end positioning and attempted stop-loss plays on Monday with low liquidity inevitably an important feature between the Christmas and New-Year period.
Yen weakness was again the dominant focus during much of the Asian session with follow-through selling from Friday. The combination of Nikkei gains and expectations of further Bank of Japan easing in 2014 undermined the Japanese currency and there was further interest in global carry trades on a perceived improvement in risk conditions.
With Japan on holiday during Tuesday, this was the final Tokyo session of 2013 with last-minute window-dressing boosting the Nikkei and pushed USD/JPY to a fresh five-year peak just above 105.40 before hitting significant profit taking while EUR/JPY again challenged the 145 area.
Over the weekend, ECB President Draghi stated that there was no urgent need for further action on interest rates which helped maintain underlying Euro support even with US 10-year yields at a two-year high. EUR/USD drifted only very slightly lower to the 1.3740 area in early Europe.
There was further speculation over asset-repatriation by European banks ahead of the year-end. The ECB will conduct an Asset Quality Review (AQR) during 2014 which will be based on end-2013 capital positions. There is, therefore, be a strong incentive for banks to bolster balance sheets ahead of year-end. Although this will tend to support the Euro for now, it also suggests that Euro demand will fade once the year-end passes.
There w as still solid demand for European currencies on any significant retreat during Monday and, after finding support below 1.3740, there was a fresh advance towards 1.38 during the New York session as USD/CHF dipped below the 0.89 level.
The latest US pending home sales data was slightly weaker than expected with a 0.2% monthly increase and 4% unadjusted annual reduction which did little to bolster dollar support and EUR/USD made a fresh attempt at breaking above 1.38 before hitting resistance.
The UK Hometrack house-price index registered a 4.4% annual increase in the year to December which helped sustain confidence in the 2014 growth outlook as gilt yields remained around two-year highs. EUR/GBP did find support near 0.8330 and rallied to the 0.8360 area as GBP/USD found buying interest towards 1.6450 and rallied back above 1.65.