Forex: Dollar Sees Extreme Period Quiet as Market Weighs December Taper

Talking Points:

Dollar Sees Extreme Period Quiet as Market Weighs December Taper
Japanese Yen Crosses Extend Rally, EURJPY Gaps to 5 Year High
British Pound Traders Should Be Careful Of Trade, Factory, GDP Updates

Dollar Sees Extreme Period Quiet as Market Weighs December Taper
There is a serious contradiction between fundamental developments and actual price action behind the dollar. Through the opening session of the new trading week, we were met with a dense round of Fed speak which stokes rate speculation already roused by last week’s NFPs. And yet, the Dow Jones FXCM Dollar Index (ticker = USDollar) has gone 14 consecutive days without a 0.3 percent or greater change – the longest period of inactivity by this measure since June 2007. This certainly fits the profile of the typical, year-end holiday liquidity drain we have come to expect; but can we avoid meaningful bouts of volatility as headlines on the top 2013 trading populate the news wires?

Attempting to feed the hawkish swell that began last week after the general improvement in US labor statistics for November (a robust 203,000 NFP, 7.0 percent jobless rate, improved 62 percent participation rate), we had a commonly skewed round of Fed official speeches Monday. Richmond Fed President Jeffrey Lacker (not a voter) started the day by saying a December Taper discussion was a possibility, and that he wanted to telegraph further plans of quantitative easing. St. Louis Fed President James Bullard (a voter) suggested a small Taper at the upcoming meeting could signal the FOMC’s acknowledgment of the improvement in labor conditions and still offer room to maneuver. And, Dallas Fed President Richard Fisher shook off any of his (slight) dovish misgivings of recent months when he said the costs of QE far exceed the supposed benefits, and he went on to suggest ending the program as soon as possible.

Over the past three months, we have seen a significant shift in monetary policy expectations amongst the speculative ranks. First, there was a certainty of a September Taper which the Fed thwarted. From there, a December timetable was pushed out to March with the market uncertain of the ramifications of the US Federal Government shutdown through the first half of October. Yet, the positive data and surprisingly consistent voice from various Fed officials as well as official statements that have stacked up since seem to again turn the dial to a more timely policy move. There are measures of probability showing a hawkish shift across various market participants. A Bloomberg survey shows 34 percent of economists expect a reduction in the stimulus program this month (from 17 percent in November). The Reuters poll reflected 22 percent of Primary Dealers suspected an early Fed move. And, even a look to search traffic shows a surge in interest in the term ‘December Taper’ as ‘March Taper’ fades to nothing. This is significant and unbalanced speculation that would lead to serious market turmoil before, during and after the event in normal conditions. But these aren’t normal conditions. Perhaps that’s why it would be a better time for the Fed to move…

Japanese Yen Crosses Extend Rally, USDJPY and EURJPY Gap to 5 Year High
If the markets are supposed to settle through the end of the year, the Yen crosses didn’t get the memo. The Japanese currency opened the week with a gap against many of its majors and a universal extension on its revived bull run. While that meant gains for the traditional carry pairs like AUDJPY and NZDJPY, the real records were seen elsewhere. USDJPY and EURJPY moved to highs not seen in five years – the former on a close basis and the latter with its close and intraday measure. The similarity between the current situation and that of the 2012-2013 surge that preceded the BoJ’s QE1 may be too obvious to ignore. Yet, why would the market pay heed to the Japanese agenda and play down the changing probability of the Fed program? The former both fits existing trends and flourishes in a low-volume / low-volatility environment. But, should volatility shatter this quiet, these pairs are highly exposed.

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British Pound Traders Should Be Careful Of Trade, Factory, GDP Updates
Should the markets maintain their comfortable trends, the sterling’s bullish climb may benefit. GBPUSD has advanced to levels not seen since August 2011 on a climb that was universal versus the majors. The docket was empty for traditional indicators, but that didn’t stop the currency’s slow advance. BoE Governor Carney weighed in during the opening session, and the market seemed to find nothing to contradict its drive to lift the currency. However, where verbal warnings by the policy authority have lacked for sway, we have seen numerous instances were data has altered yield perceptions. That makes the upcoming session interesting for industrial production, trade and NIESR GDP estimate figures.

Euro May Avoid Serious Year-End Downturn with Little Room for QE Discussion
The Euro was delivered a serious blow last week when the market realized the ECB was contemplating a reversal in its monetary policy bearing and surprised with a rate cut at the policy gathering. The risk of a new stimulus program – and the lower interest rates and money supply bloat it brings with it – are still a very probability. Yet, it is unlikely to occur over the next few weeks outside of the central bank’s policy cycle. That scenario may endow the euro a sense of stability during this active period of monetary policy speculation.

Canadian Dollar Bounce Struggles for True Break Post Jobs Data
The Canadian dollar failed to gain traction through the end of this past week despite the implications of a strong US labor data (the country’s primary trade partner) and its own encouraging jobs report. USDCAD is sitting conspicuously just above 1.0620 – a floor for the past week. Yet, is a ‘break’ – even a correction such as this – likely as expected volatility fades for this currency and the general market?

Australian Dollar Gains Little Traction on Chinese Data as Aussie Yields Slip
While many majors were light for data, the Aussie dollar was met with an abundance of fodder. From its own docket, this morning brought business sentiment and investment lending figures. More prominent were the Chinese November trade balance (much better at $33.8 Bln) and industrial production figures (slightly below consensus at 10.0 percent). The Aussie 10-year yield and 12-month rate forecast slipped Monday.

Gold Speculative Futures Positioning Plunges Back Towards 8-Year Low
Extending the aggressive unwinding for a fifth consecutive week, net long gold futures positioning dropped another 15 percent this past week according to the Commitment of Traders report – leaving the balance (22,691 contracts net long) near its most bearish level in 8 years. In the same market, open interest has dropped fast; while ETF holdings of the precious metal have also hit fresh multi-year lows. Positioning is in a dangerous position considering the metal is so close to slipping below $1,200 and instituting 3-year low.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:01

GBP

RICS House Price Balance (Nov)

60%

57.00%

0:01

CNY

CHINA Manpower Survey (1Q)

14.00%

0:30

AUD

Home Loans MoM (Oct)

1.0%

4.40%

After disappointing GDP and Trade Balance data, the Aussi will need some good data is it looks to find a solid low before the end of the year.