Euro and Yen May Rise as Aussie Dollar Falls on Soft US Data

Talking Points:

Quiet European Calendar Puts US Retail Sales, UofM Consumer Confidence in Focus
Disappointing US News-Flow Given Firm Fed Rate Hike Bets May Spark Risk Aversion
Euro and Yen to Rise as Australian Dollar Declines if Risk Sentiment Trends Unravel

A relatively quiet economic calendar in European hours will put the spotlight on US news-flow. November’s Retail Sales data as well as December’s University of Michigan consumer confidence gauge are on tap, with improvements expected on both fronts.

Markets already put the probability of a rate hike at next week’s Fed meeting at over 80 percent. This means that absent wild deviations from expectations, on-coming news-flow is unlikely to materially change investors’ calculus and offer relatively little fodder for monetary policy divergence speculation.

The data’s implications for risk sentiment may be market-moving however. US news-flow has softened relative to consensus forecasts over recent weeks, opening the door for underperformance. Such results given firm bets on imminent tightening may trigger growth fears, feeding risk aversion. This may hurt sentiment-geared FX like the Australian Dollar and boost funding currencies including the Yen and Euro.

The Aussie corrected lower in overnight trade following yesterday’s sharp surge in the wake of November’s upbeat employment data. The Yen also faced selling pressure as Japan’s benchmark Nikkei 225 stock index pushed upward, sapping demand for the safety-linked currency.

Both moves played out against a backdrop of a broad-based recovery in the US Dollar. The greenback looked to be correcting upward amid pre-positioning for next week’s FOMC rate decision after hitting a monthly low yesterday.

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