Talking Points:

Dollar on Cusp of Big Bull Trend Upgrade with CPI Ahead
Euro: Perception of Stability Improved on ECB Stress Test Changes
Australian Dollar Drops to 3-Year Low after Sharp Jobs Report Miss

Dollar on Cusp of Big Bull Trend Upgrade with CPI Ahead
Next to the S&P 500’s advance to fresh record highs, the most impressive performance in the market this past session was the US dollar’s charge to its own four-month high. This is a thematic contradiction to the greenback’s normal function as a safe haven currency. Yet, it has become abundantly clear that the currency does not need to fall back on volatility and its liquidity appeal to generate bullish sentiment. Of course, if sentiment were to collapse with panic driving investors to deleverage and seek out a stable market in which to hold their capital; the dollar would certainly shepherd capital into US Treasury and money markets. To maintain bullish potential through a ‘status quo’ scenario and be even better off during a ‘crisis’ puts the benchmark currency in a uniquely robust position.

A revived interest in Taper speculation has recharged the dollar – a focus that has leveraged greater strength for the benchmark against counterparts that have been driven to the opposite end of the rate spectrum like the Japanese yen and Australian dollar. In the fallout from the shocking December NFPs miss, we have seen data and Fed speakers slowly build expectations for a steady reduction in the QE3 program back up. Following the remarks of hawkish Fed voters and minor economic data earlier in the week, Wednesday’s developments carried the most weight. Arguably the Fed’s most dovish member, Chicago Fed President Charles Evans remarked in a statement that a measured Taper made “a lot of sense” and that he expected a similar move in January. If this is the most likely person to voice an argument against the austere-lite move, it is very telling of the group’s mindset. Adding to expectations of a consistent stimulus wind down, the Beige Book – the bank’s progress report before meetings – noted a ‘positive’ economic outlook and even wage growth in eight districts.

The upcoming session offers event risk that could even further up the ante on rate and dollar speculation. Both Fed Chairman Bernanke and John Williams are scheduled to speak. However, real escalation would come if data were to show an increased ‘cost’ in stimulus that would necessitate a more aggressive Taper pace. The December CPI (consumer price index) update is expected to reflect a further upgrade in pressure with a 1.5 percent year-over-year pace of growth. That would still be short the bank’s target, but it puts us on pace.

Euro: Perception of Stability Improved on ECB Stress Test Changes
The euro was modestly weaker against its major counterparts this past session, but the backdrop is stable enough to keep the tap open for foreign capital to flow into the Eurozone. Appetite for high return assets – in a low yield world – has directed a veritable flood of funds into the once crisis-plagued ‘periphery’ bonds. That demand was showing through in strong form this past session with Spanish and Italian 2-year sovereign note yields hitting fresh record lows. Meanwhile, Portugal sold €1.01 billion euros in 12-month bills at its lowest yield since November 2009. And what of the threat of a shock of a regional financial crisis? The ECB reportedly reduced banks capital requirements from 8 to 6 percent for the region’s stress tests.

Australian Dollar Drops to 3-Year Low after Sharp Jobs Report Miss
A disappointing December employment report was seemingly the catalyst bearish Aussie dollar traders were looking for. A 22,600-position drop in national payrolls was an unexpected and large loss. While this is certainly discouraging for domestic growth hopes, it doesn’t materially increase the chance that the RBA will pursue further rate cuts. Nevertheless, swaps that were tentatively looking for distance hikes tumbled and the 2-year government bond (a time frame that most central banks are expected to turn to tightening in), dropped as much as 3.6 percent.

British Pound’s Hawkish Engine Growing Cold, Exposes Currency to Reversals
Support for an imminent rate hike from the BoE (later in 2014 is not really immediate, but early compared to counterparts) continues to fade, yet the sterling is not ready to give back its yield premium. This past session, Governor Carney offer little to speculate on, and early this morning the RICS House Price survey pulled back from an 11-year high. A 30-year bond auction scheduled for tomorrow will help gauge traders confidence.

Japanese Yen Settles as Dollar Exploits its Policy Differences
Expected volatility on the yen crosses continues to drop. That is an important sign for bulls. As long as the markets are quiet, the FX market will generally revert to its most consistent trends – including a decline for the yen as traders adjust for and exploit the Bank of Japan’s massive stimulus efforts. Pairs like USDJPY offer better potential – as the Fed is Tapering – while the likes of AUDJPY will struggle to keep pace.

Canadian Dollar Muscles a Meager Rebound Ahead of Capital Flow Report
Against the backdrop of the USDCAD’s impressive bull wave, the Canadian dollar’s ability to advance against all of the majors this past session stands out. Yet, despite the breadth, the scope of the move was relatively limited (between a 0.1 percent advance versus the USD up to a 0.8 percent rally versus the franc). In Thursday’s session, look to the November capital flows report to monitor the currency’s fall from carry.

US Oil Posts Biggest Rally in Six Weeks, Helped by Inventory Drop
That didn’t take very long. We had noted the anxiety-inducing congestion oil had fallen into yesterday – a contrast to the momentum of the past weeks – and the market moved to break its constraints Wednesday. The 1.7 percent rally for the US-based energy product was the largest we’ve seen in six weeks. Volume during this bullish break was slightly weaker than the previous session’s chop and the CBOE’s oil volatility measure dropped back to 18.7 percent. For influence, the record high in US equities was a tangible support; and a 7.7 million barrel drop in weekly inventories according to the US Department of Energy report.

Gold Slips a Second Day as Futures Open Interest Climbs
Bulls only had one day above the $1,250-mark before gold lost its bid. The metal slipped a second day through Wednesday, but volume and pace are restrained. That said, as long as volatility measures are low and the dollar advancing, the pressure will remain. It is worth noting that futures open interest has surged to a six-month high. This may be a sign for speculative appetites which will look to COT to confirm.**Bring the economic calendar to your charts with the DailyFX News App.

ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:01

GBP

RICS House Price Balance (DEC)

60%

58%

The measure is currently at levels not seen since 2004.

0:30

AUD

Employment Change (DEC)

10.0K

21.0K

Employment figures out of Australia usually stir a good amount of volatility at the print. Last month’s 21K reading was the since best print since the spring of 2013. Although the participation rate is estimated to remain unchanged, it has been on the decline since the start of 2011.