Talking Points:

Dollar Ready to Break…If the NFPs Can Live Up to the Hype
Euro Finds a Modest Relief Run after ECB Stays its Stimulus Hand
British Pound Trouble Growing as Data Misses Mark

Dollar Ready to Break…If the NFPs Can Live Up to the Hype
The stage is set. The US dollar has worked itself into a position where it is easily susceptible to volatility just in time for the December Non-Farm Payrolls (NFPs). Yet, forcing a breakout – much less generating a meaningful trend – may be more difficult than our contrarian readings would insinuate. Looking to volatility measures for the benchmark currency, we find the medium-term FX Volatility Index is hovering at its lowest level since November 20. More specific to the benchmark dollar, the rolling 20-day (one trading month) Average True Range (ATR) on the Dow Jones FXCM Dollar Index (ticker = USDollar) is a sparse 36.3 points. That is the lowest activity level for the currency since May 2002.

Extremes are severe but temporary states. Just as extraordinary periods of volatility settle as they revert back to a historical mean, extreme levels of inactivity beget breakouts and larger price swings. Pairing the current backdrop to one of the most recognizable, market-moving pieces of event risk seems the equivalent of dropping a lit match into dry tinder. Yet, over the past months we have witnessed just how resistant the markets are to returning to ‘normal’. For the December employment data, the watershed moment has already been realized. TheFederal Reserve has already taken the remarkable first step to decelerate its immense QE3 stimulus program at the December 18 FOMC policy meeting. That was the objective that many fundamental traders were trying to ascertain from the labor trends.

Though it is a very early first step, the change in tack by the US central bank is still critical to capital markets and the dollar. If the jobs statistics support expectations of a steady path of belt QE belt-tightening moving forward, it can bolster market rates and thereby raise the dollar’s profile. The more severe impact though would come alongside a tremor of general fear throughout the financial markets. If investors begin to worry about record levels of leverage, exposure to risky assets, low rates of return and tepid participation; liquidity can seize quickly.

Watch the market’s reaction to the December NFPs Live as Strategist David Rodriguez covers the data’s release in DailyFX-Plus.

Euro Finds a Modest Relief Run after ECB Stays its Stimulus Hand
There was a modest relief move from the euro this past session. Following the record low December Eurozone inflation report on Tuesday and record high unemployment rate the following session, concerns were building. Not only were conditions fading, but this looked very much like an echo of what had happened in November – unfavorable developments in these data series motivated the ECB to cut its benchmark lending rate unexpectedly. Given the ongoing speculation of a stimulus program to follow up on that otherwise, ineffective move; there was some fear / hope that the central bank could introduce a new stimulus-like program at Thursday’s policy meet. Yet, the ECB stayed the course, and President Trichet – though emphatic with his ‘whatever is necessary’ remarks – focused on cuts. This may temper Euro-related stimulus expectations.

British Pound Trouble Growing as Data Misses Mark
There was little surprise to be found in the Bank of England’s (BoE) rate decision outcome. By maintaining the benchmark rate at 0.50 percent and the asset purchase target at £375 Billion, the MPC (Monetary Policy Committee) stayed the course and avoided the need for a statement that would clarify their intentions. Traders expected this. In turn, there is little change to the forecast for the timing of the first rate hike the sterling, which has been a key source of strength for the currency over the past six months. That said, there was another perceptible ‘miss’ in the data. The trade deficit joins the BRC inflation report as another weakening of the rate hike support. This may be a death from a thousand cuts.

Yen Crosses Need BoJ QE Chatter to Reengage Steady Advance
Though equity indexes and other benchmarks for ‘risk trends’ have floundered through the start of the year, the yen crosses don’t necessarily need a full blown appetite for yield to support their advance. In the absence of a drive to carry – even carry as historically thin as we are currently facing – the Japanese yen based crosses still have the BoJ to support their run. The central bank has made a concerted effort to devalue its currency through stimulus. As of late, however, the masses have lost faith or interest. Policy officials need to turn up the QE speculation.

Canadian Dollar Traders Prepare for Volatility with Local and US Jobs Data on Tap
Once again, the focus for North American session trading will be diverted to the US employment statistics. However, loonie traders will have two opportunities to see a sudden swell in volatility. From the NFPs, the market assesses the health of the US economy and general risk trends – an important aspect of the loonie’s health. Yet, the domestic jobs report is the more concentrated potential – especially amid the crosses.

Australian Dollar Shudders but Stable after Chinese Trade Report
The Australian dollar received a quick jolt from the release of Chinese trade data today, but the swell wouldn’t last. The $25.6 billion surplus for December was a retreat from the biggest positive gap in six months. China’s health is particularly important for Australia’s exports, but the country’s own external purchases rose 8.3 percent. Furthermore, the Commerce Ministry pledged 2014 would promote steady import growth.

US Oil Books 8-Month Low as Futures Open Interest Tumbles
The bearish fire continues to burn on oil. The benchmark US futures contract dropped for the seventh time in eight trading sessions and subsequently dropped to an 8-month low on the close. It’s worth noting that open interest on the derivative stands around 1.615 million contracts – nearly the lowest level in a year. Whether speculative or hedge appetite, this is possibly a sign of lasting price relief.

Gold Volatility Near 9-Month Low Just Before NFPs
Talk about complacency…The CBOE’s Gold Volatility reading dropped below 18.5 percent Thursday, hovering at the floor of the eight-month range the measure has maintained since the metal suffered its dramatic collapse below the $1,500 back in April. This would insinuate that there is little risk of heavy swings for the precious metal over the coming three months. Yet, in the forthcoming session, we have a key piece of fundamental data to stir speculation surrounding the pace of the Fed’s stimulus wind down. And, even if this one-off spark fails to hit the mark; the outlook for the commodity’s ‘alternative store of wealth’ is permanently altered. Meanwhile, open interest in the futures space is dangerously close to 5-year lows. Taken in conjunction with the near-12 year low in net speculative long interest, we are looking at a serious change.**Bring the economic calendar to your charts with the DailyFX News App.

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