Forex: Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600

Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600
Euro Climbs as Rates Rise Alongside LTRO Repayments, But What about the ECB?
Japanese Yen on Track for its 12th Consecutive Weekly Rally
Australian Dollar Tumbles Slips after Chinese Manufacturing Report
Swiss Franc: SNB FX Holdings Hit Record Highs in 4Q Despite EURCHF Lift
Canadian Dollar Rallies after GPD Beats Expectations
Gold Posts Third Largest Drop this Year on Fading Volume, NFPs Ahead

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Dollar Slides Across the Board Ahead of NFPs, EUR/USD Above 1.3600
There was little fundamental recourse for the dollar this past session. As risk trends stabilized, a momentum-supported EURUSD bull trend led the anti-dollar drive with a close above 1.3600. This is the first time since November 2011 that this benchmark pair has been exposed to these heights. And, given the critical sea change between these two currency’s – one is seeing its central bank balance sheet contract while the other continues to expand – the deliberate move will continue in most conditions that do not spark a wholesale demand for the greenback. That said, the world’s reserve currency was little changed against its other liquid counterparts. For a true dollar recovery, though, we need a catalyst.

The most reliable, bullish ignition for the US dollar would be a wave of risk aversion that sends speculators scrambling from their ‘high’ yield and high risk assets to seek shelter in the world’s reserve currency and asset (Treasuries). Though we have seen EURUSD advance, yen crosses swell and the S&P 500 tread steadily higher; we haven’t seen a committed risk appetite drive in some time. Absent is a significant rise in market returns (reward) alongside a steady or diminishing expectation of volatility (risk). And, while the benchmark for risk trends haven’t reversed course, we are starting to see the early signs lean in that direction. Notably, both the equity and Forex based volatility indexes have climbed from their multi-year lows. Furthermore, junk bond interest (notably low quality, high risk and high yield) has taken a hard drop. This is still a latent threat to change course. We need something that offers a concrete motive to spurn risk. Perhaps Nonfarm Payrolls (NFPs) can provide.

In recent months, the United States’ monthly labor report has elicited limited interest from the market – in other words little volatility and far less trend development. The forthcoming January release will prove just as effective. A sizable deviation is needed to make the monthly payrolls print move the market meaningfully. Instead, there is another aspect to this event risk that will carry heavier influence over speculative interests. Back in December, the Federal Open Market Committee (FOMC) announced that they would buy $85 billion in Treasuries and mortgage backed securities (MBS) until the unemployment rate was expected to hit 6.5 percent and/or inflation returned to 2.5 percent. That jobless rate is our best indication to the pace and longevity of the Fed’s stimulus efforts – a policy that supports risk appetite and lowers US rates (both devaluing the dollar). The unemployment rate is expected to hold at 7.8 percent, so a dip could generate market reactions.

Euro Climbs as Rates Rise Alongside LTRO Repayments, But What about the ECB?
The euro continues to climb against the US dollar and Japanese yen with considerable gusto. Yet, the shared currency gave back ground to its New Zealand and Canadian counterparts this past session. What is the fundamental difference in these performances? For pairs like EURNZD and EURCAD, the yields advantage is far greater for the pairing currency and they’re rate outlooks have both improved recently (more on that below). Alternatively, the US and Japan are under severe easing efforts that bloat the money supply and weigh rates of lower and lower. That gives the Euro a distinct advantage.

From mid-December, the Euro-area’s benchmark market rate (the three-month Euro libor) has risen 26 percent. In reality, the yield spread between the Euro and US has contracted (it’s still in the dollar’s favor) since August. The early LTRO repayments are a critical advantage for the euro – especially over the dollar. Yet, policy officials and the ECB have voiced concern. Would they lower rates to prevent rates’ advance? The probability may be higher than many appreciate, especially after Germany posted a CPI reading of 1.7 percent – a November 2010 low.

Japanese Yen on Track for its 12th Consecutive Weekly RallyThrough Friday morning, USDJPY is up another 1.5 percent. At this pace, the pair will mark an astounding 12 consecutive week rally. However, we can also measure its performance on a different time scale. On a monthly basis, the pair has risen four consecutive months and increased its pace consistently. It is appropriate to regard the pair in this scale because its fundamental crux is competitive stimulus. Will the market realize that it has priced in serious stimulus by the BoJ that won’t take place until next year? Be careful, because a risk aversion move will remind them.

Australian Dollar Tumbles Slips after Chinese Manufacturing Report
With equities floundering in their otherwise impressive advance, the Australian dollar was left open to adverse fundamental developments. On the positive size, the 12-month rate forecast for further easing is near its softest level since August 2011. On the other hand, the economic engine that drives the nation showed a sputter this morning. Though there was a better HSBC version of the report released later, the official manufacturing activity survey for January missed expectations and weighed on export hopes in Australia.

Swiss Franc: SNB FX Holdings Hit Record Highs in 4Q Despite EURCHF Lift
Coming under the radar this past session, the Swiss National Bank reported fourth quarter foreign exchange holdings and its composition. Despite the rise in the EURCHF exchange rate (where much of their attention and intervention effort has been directed) in 4Q, holdings rose to a fresh record of 432.2 billion franc. So perhaps the drop from EURCHF over the past few days in the face of EURUSD advance is unwinding…

Canadian Dollar Rallies after GPD Beats Expectations
Fundamentals aren’t the straightforward drivers that they used to be, but there are still drivers with clout. Though a monthly reading, the Canadian November GDP reading beat expectations and sent USDCAD sliding this past session. The data’s influence has passed, and now the focus for this key pairing will turn back to risk trends and stimulus expectations.

Gold Posts Third Largest Drop this Year on Fading Volume, NFPs Ahead
Despite a relatively reserved trading day for the capital markets, gold managed a 0.8 percent tumble Thursday – its third largest this year – that erased all of the previous day’s gains. In the upcoming session, we have the US employment data. Given the importance of the jobless rate to policymakers, expect gold bugs to be just as studious in interpreting the statistics for stimulus changes as the FX crowd.
**For a full list of upcoming event risk and past releases, go to www.dailyfx.com/calendar
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