Talking Points:

Dollar Recovers on Fed Taper Talk…but So Do Equities
British Pound Refuses to Give Ground after Softer CPI
Euro Advances Despite Risks Arising in Investment Appetite

Dollar Recovers on Fed Taper Talk…but So Do Equities
The dollar’s most audacious hope for a full blown bull trend evaporated this past session when the risk aversion move that opened the week was turned higher. Yet, a market-wide appeal for liquidity isn’t the only value the world’s most liquid currency has to offer. A hawkish round of Fed-speak doused speculation that the central banks Taper pace could be interrupted by last week’s disappointing December payrolls report. In response to sizable NFPs miss last Friday – the biggest since the November 2008 report – the dollar dropped from congestion and US equities eased higher. The fear / hope was that this poor data would signal an imminent risk to policy officials should they make a consistent pace out of December’s Taper. Where Atlanta Fed President Lockhart made traders second guess that concern on Monday, remarks from Dallas President Richard Fisher and Philadelphia President Charles Plosser fully revived expectations for another $10 billion QE reduction on January 29.

Both Fisher and Plosser are voting members on the Federal Open Market Committee (FOMC) this year, and both are known hawks. And, they did not disappoint their policy camp this past session. Addressing the NFP concern directly, Plosser remarked in his Q&A that we shouldn’t read too deep into last week’s labor statistics. He suggested this was, as yet, a single data point. He went on to reiterate a sentiment that many Fed members have intimated: that the threshold to turn the central bank off its Taper pace was ‘high’. Fisher would live up to his reputation for being the most hawkish voice at the Fed. Many latched on to his statement that he would have preferred a $20 billion stimulus reduction, but his more significant rumination was his connection between markets and monetary policy. The hawk observed that the market had “beer goggles” on whereby everything looks better when liquidity was freely flowing. Weighing in on a scenario that most risk-bulls no doubt ponder on a regular basis, Fisher went on to say that he would still vote for a Taper even if equity markets were correcting lower.

Outside of the Fed chatter, the better-than-expected NFIB small business sentiment survey and retail sales report for December would do their part to add to Taper speculation. In the absence of a concerted ‘risk’ move moving forward, this relative monetary policy aspect will be the greenback’s guiding light. In the session ahead, we have two more Fed speakers (though neither Evans nor Lockhart is a voter) and an inflation report (the CPI figure on Thursday trumps the PPI’s influence). As comprehensive as it is, it may not be influential enough to fan a trend.

British Pound Refuses to Give Ground after Softer CPI
The pressure for the Bank of England (BoE) to return to hikes ahead of its forward guidance schedule continues dissipate. That is at odds with how the sterling is position – refusing to give back its tremendous gains over the past six months won via speculators’ expectations of a late 2014 rate hike. The data that crossed the UK docket this past session is perhaps the most damning evidence against a forced tightening by the central bank. The round of December inflation data showed tempered price pressures led by the headline CPI reading, which fell back in line with the BoE’s target for the first time since November 2009. The sterling initially shrugged off the data, but the contradiction is growing.

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Euro Advances Despite Risks Arising in Investment Appetite
The euro advance against most of its counterparts this past session, but the fundamentals were not exactly flattering. Data was not the fosu of the day, rather a broad array of headlines painted a concerning picture for foreign investors. The Japanese Current Account release, which reported sizable investment in Italian and Spanish bonds in November, reminds us of the saturated level of investment in these one feared economies – so much so that the two-year yields are at record lows. The greater the exposure, the greater the risk to traditional volatility measures. Elsewhere, French President Hollande announced major spending cut plans and an ECB document noted concern about stress tests.

Yen Crosses Leverage Biggest Rally in Four Weeks
The biggest drop for the yen crosses in months (USDJPY posted its biggest loss since September 18) Monday was followed by the largest advance in weeks (four weeks for the same pair) the subsequent session. Volatility begets volatility, but it doesn’t guarantee trend. Risk aversion needs to truly establish itself to force deleveraging on yen crosses where quiet sees the BoJ’s stimulus efforts push the market higher.

Canadian Dollar Tumble Continues with USDCAD Facing 1.01
Though it isn’t on the extreme end of the stimulus forecast nor does it have major market-moving catalysts, the Canadian dollar is proving to be one of the most consistent movers out there. The Bank of Canada’s move away from its ‘rate-hike-sometime-in-the-future’ stance is leading the loonie to continuously bleed carry premium. Now with the Fed implementing the Taper, USDCAD is at 3-year highs just below 1.0100.

Australian Dollar Diving after World Bank Downgrades China Outlook
The Australian dollar stumbled Tuesday and it was still under pressure through this morning’s trade. The rebound in capital markets did little for the carry currency despite the ill performance of the funding side, nor did a jump in Aussie government bond yields help its own rate outlook. That said, the World Bank’s downgrade of China’s 2014-2015 growth outlook led to an immediate bearish pressure.

US Oil Heading Towards Another Breakout, Can Inventories Offer the Spark
US-based crude prices are working into a consistent congestion pattern above $91.50. We have been here before, where consolidation ultimate ends with a meaningful technical break. The question is how long the build up takes before the next move is decided. We find any areas of the energy block are still moving with pace but the crude volatility index is sidelined. Perhaps today’s Dept of Energy report will shake the market.

Gold Volatility Lowest Since Before April Collapse, Dollar Still in Control
Risk of extraordinary volatility for the gold market has dropped to its lowest level since April 11 (16.5 percent) according to the CBOE’s measure. Given the negative correlation between the activity measure and commodity (a swell in expected activity usually meant a fear of tumbling prices), this is a relief for bulls. However, the implied activity level of the market does not save gold from a more steadfast decline moving forward. The US dollar will be a key element to that future. And, if either risk aversion or Taper appeal takes off, the greenback can present more problems.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:30

AUD

New Motor Vehicle Sales (MoM) (DEC)

-0.9%

The MoM print was revised from -0.7% to -0.9% and the YoY from -3.1% to -3.2%.

0:30

AUD

New Motor Vehicle Sales (YoY) (DEC)

-3.2%