Talking Points:

Dollar Churns Ahead of US CPI, FOMC Decision
British Pound May be at Risk from CPI if Rate Forecasts Over-Extended
Euro Offers Modest Gains on Questionable, Clean Bill of Health

Dollar Churns Ahead of US CPI, FOMC Decision
We are inching closer to a full evacuation of speculative liquidity for year-end, and trading conditions are being further depressed by a preoccupation with the FOMC rate decision on Wednesday. It is important to consider this market backdrop when digesting the seemingly breakout-prone majors’ charts. An appropriate depiction of these unconstructive conditions has been made by the Dow Jones FXCM Dollar Index (ticker = USDollar). Over the past week, the benchmark index made two moves at breaking a restrictive 70-point range – bullish and bearish – and both failed. To follow up on these failed moves, Monday’s daily range measured a little more than 25 points. In the past 12 months, we have seen only four days where the markets were less active.

On the docket through the opening session, there were a few notable fundamental updates – though not much of the ‘Taper’ fodder that traders are pining for. For economic health check, the leading US manufacturing index from Markit reported an unexpected downtick in activity for its December reading. The 54.4 reading, however, is still indicative of growth; and the employment component showed a faster rate of growth. Rate watchers would also take note of the large $194.9 billion in net capital inflows measured by the October TICs report. The biggest influx in five years was partly a reversal of the large outflow the previous month; but the fluctuations are a useful indication as to how speculation surrounding Fed changes are impacting the market (the September Taper deferral caught many off guard).

The market will not likely hit a full boil until Wednesday’s Fed meeting, but the upcoming session offers a last round of data to contemplate before the policy officials weigh in. The November CPI figures are particularly fitting in the lead up to monetary policy discussions. The previous months’ 1.0 percent headline reading was a four-year low. Will there be any inflation speculation to work with at the policy gathering?

British Pound May be at Risk from CPI if Rate Forecasts Over-Extended
While most of the market’s concentration is being partitioned off to the Fed and the off-chance that the Fed could divert its monetary policy course, we are coming into data that will tap a far more active rate forecast. The market has defied the BoE’s forward guidance and progressively priced up a timely rate hike from the central bank. Data has steadily fed the hawks’ confidence, and the upcoming round of inflation figures will be particularly suited to this line of speculation. A pick up in price pressures could be interpreted as a sign that the policy authority will be forced to act sooner than it wants to. Alternatively, a tepid figure can sow doubt in a bloated yield forecast. The CPI will be the target with the headline figure expected to hold at a four-year low, 2.2 percent. The upstream (RPI, PPI) and housing (ONS) price pressure reports will add to the bigger picture. To further feed rate speculation, Wednesday will bring the BoE minutes and November jobs figures.

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Euro Offers Modest Gains on Questionable, Clean Bill of Health
The headlines were filled this past session with updates that direct Euro and ECB policy forecasts. On the docket, the Eurozone PMI figures – considered loose equivalents to the laggard GDP data – showed a better-than-expected regional Composite (52.1) and improved German numbers. Yet, the France assessment was one of a tip into possible recession. Central bankers have to consider this ‘two-speed’ economy when deliberating policy. The uneven economic picture conditions bode well for the Troika-rescued countries that are existing this stimulus programs. Ireland left its protected position last week and Portugal received a good grade on its progress report for a mid-2014 exit. Neither of these countries is seen taking a precautionary credit line. Similarly, the EBA reported banks cut nearly €817 billion in assets through June.

Yen Crosses Retreat, Nikkei Presenting Headwind
Despite the rally in US and European equities Monday, the yen crosses were drifted modestly lower through the day. Yet, the carry-bound pairings have maintained far-better staying power than the Nikkei 225 as of late. With a sharp drop through the opening session, the benchmark Japanese equity index was is down 2 percent from its peak two weeks ago. Risk trends are flagging ahead of the Fed’s policy weigh-in. Meanwhile, 10-year sovereign yields from US to Australian Treasuries are ranging from no change to sharp corrections.

New Zealand Dollar: Budget Outlook Upgraded…So Are Rate Forecasts
The New Zealand dollar is up – though modestly – against all of its counterparts this morning. Following up on strong showing in the fourth quarter Westpac Consumer Confidence survey (the highest since 3Q 2009), the mid-year budget update from the Treasury upgraded growth and surplus forecasts. In response government bond yields dropped 2 percent – less a burden on return and more a sign of demand.

Canadian Dollar Slides after Weaker Capital Inflow Report
A net C$4.4 billion in net capital flowed into the Canadian economy through October according to Stats Canada data this past session. Though that was the fourth net investment made into the economy, the inflow was half of the previous reading – a discouraging trend for a supposed carry currency with a fading yield outlook.

Australian Dollar Finds Limited Comfort in Repeat RBA Minutes
Interest rate forecasts seem to have stabilized for the Australian dollar. The 12-month forecast bounced jumped 7 bps from Friday to nudge the critical measure for this carry currency up from its October 31-low. Speculators are still concerned about the prospects for further rate cuts – whether due to local issues or as a side effect of a China slowdown. The minutes kept all options open this morning – including further cuts.

Gold Rises for Second Day after Net Short Build Up in Futures Stalls
Gold rose for a second consecutive trading day Monday. The 0.2 percent advance was a weak follow up on Friday’s bounce from $1,225, but it nevertheless offers some buffer room for stressed bulls. Last week’s speculative futures positioning data (COT) offered a similar, tepid relief. Net long interest rose for the first time in six consecutive weeks, but it gives us little buffer to the near 9-year low the indicator stands so near to. The same is true of spot gold, on the cusp of reviving the bearish unravel should it drop below $1,200.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

23:00

AUD

Conf. Board Leading Index MoM (Oct)

0.30%

6:00

JPY

Machine Tool Orders YoY (Nov F)

15.40%

The YoY print was on a rising trend since Dec of 2012.

9:30

GBP

PPI Input NSA YoY (Nov)

-1.00%

-0.30%

Inflation considerations are critical to sustaining expectations of an inching forward rate hike forecast for the BoE. This will combine with the upcoming BoE minutes and employment statistics to create a fully –fleshed policy forecast