Talking Points:

Dollar Traders Look to Revive Taper Speculation on ADP
Euro Inflation Plunge Increases ECB Stimulus Risk
Yen Crosses Groping for Traction as Nikkei 225 Rebounds

Dollar Traders Look to Revive Taper Speculation on ADP
This past session, US Treasury yields dropped to a two-week low and the S&P 500 gathered itself for the first advance for the year. And yet, the dollar still managed to forge gains against all of its major counterparts. For the most part, the greenback’s gains were moderate; but the consistency in an unfavorable fundamental environment speaks to a possible underlying bias amongst the trading ranks heading into more eventful data and headlines. Outright bullishness, though, seems to be reserved for tangible fundamental cues that can leverage a competitive advantage for the world’s most liquid currency – whether that is on the basis of safe haven demand or relative yield. From the Dow Jones FXCM Dollar Index (ticker = USDollar), we see the currency struggling to overtake the resistance it heeded over the past three weeks at 10,720/700. We see the same hesitation with EURUSD at 1.3600, GBPUSD near 1.6300 and USDJPY below 105.50.

From the fundamental perspective this past session, an unexpectedly sharp drop in the US November trade deficit seemed to sate short-term risk cravings (advance equities) than affirm seismic changes in fundamental standings (dollar support). The Census Bureau reported a $34.3 billion deficit in the most recent report – the smallest shortfall in four years and materially better than the $40 billion consensus. The details show record exports while imports of energy products continued its slide to a 2009 low. There are longer-term implications to this data that adds to a stable domestic growth and competitive yield backdrop. Yet, the market is unlikely afford much attention to this trend while the focus remains on the Fed’s Taper and the increasingly dovish bearing of its counterparts.

With an appetite for competitive monetary policy cues, the upcoming session brings two noteworthy pieces of event risk. Many are focusing in on the FOMC minutes as it carries the most direct association to Taper speculation. Yet, this is a wrap up of the same meeting that produced updated forecasts and Bernanke’s press conference. This transcript will likely just reiterate what was said on December 18. The ADP payrolls report for December will likely offer the more tantalizing update as a benchmark for Friday’s official NFPs and jobless rate.

Euro Inflation Plunge Increases ECB Stimulus Risk
Back on October 31, the Euro was jolted by an unexpected and sharp decline in the region’s inflation reading. The immediate result was a plunge for the currency and eventually the ECB would respond with an unexpected 25 bps rate cut to the current 0.25 percent standing. This past session, the same indicator – the Core CPI reading for December – offered a steeper-than-expected decline to 0.7 percent. That is the weakest level of consumer-level inflation in decades of historical data. Yet, the weak data wouldn’t lead to a repeat bear performance for the shared currency. Further rate cuts are highly unlikely as there is plenty of evidence of diminishing return from such moves so close to zero. The real fundamental accelerator would be a new stimulus program from the ECB. That said, disinflation is not a strong motivator for such a remarkable move. The LTROs in 2011 and 2012 were impelled by banking and sovereign risk – both of which are extremely low today.

Yen Crosses Groping for Traction as Nikkei 225 Rebounds
The Nikkei 225 riding on the bullish bearings of US and European benchmarks before it. The Japanese equity index is up 1.5 percent through the afternoon, and positive sentiment has helped the risk-sensitive yen crosses…though not enough to clear meaningful highs just yet. There is still a meaningful buffer between the crosses’ spot rate and the multi-year highs set last month. The depreciation of the yen is a persistent theme for the FX market, but it also mature. The threat of a risk correction lingers, and that is keeping these pairs tethered.

British Pound Turns Lower as Industry Inflation Report Plunges
Over the past week, there have been notable misses on economic data. Normally, this wouldn’t be too concerning; but the sterling is fundamentally positioned for ‘perfection’. The pound has rallied the past six months as rate expectations have swelled on a consistent improvement in the fundamental backdrop. However, the market may have gone too far in its bullishness as speculation leaned on a 2014 BoE rate hike. Now, as various data points miss the market, concern about how far the currency has been pushed builds. Though a lower tier release, the BRC’s inflation report this morning seems a prescient update with a 0.8 percent drop for December – a series record.

Canadian Dollar Plunges on Double Dose of Weak Data
The Canadian dollar was the worst performer of the day Tuesday – by a wide margin. It wasn’t difficult to spot the impetus for the loonie’s plunge. The docket held two important readings for economic health: November trade and December manufacturing activity. The trade report was a notable miss with a C$0.9 billion deficit; but it was the Ivey PMI (46.3) which was the more severe miss and clear currency spark.

New Zealand Dollar Yield Appeal Fading
Through 2013, the rate outlook for the New Zealand dollar changed tack from a projection for a modest rate cut to more than 100 basis points of hikes in the 12-month forecast. No other major central bank is even close to that level of hawkishness, and kiwi certainly benefit from the outlook. Yet, as with the sterling, the market may have over-extended its expectations. Today, both rate forecasts and bond yields are easing.

US Oil Finally Breaks Bear Wave, But is it a Reversal?
Has the bleeding stopped? US oil posted its first green close in six trading days, but technical traders would recognize that we haven’t broken the trend of lower lows. The buoyancy in risk appetite no doubt helped this commodity benchmark, but a lasting turn needs something more material to spark a trend. Outside the speculative gravity, the Department of Energy’s weekly inventory and demand figures may stir things.

Gold Retreats Before Attempting $1,250 Summit
Another gold run has failed to hit the velocity necessary to definitively turn the tide in the bulls’ favor. The precious metal posted a 0.5 percent drop this pass session – faltering a second day below the $1,250 psychological threshold. Volume on the day via derivatives was modest, ETF holdings hit new lows and the CBOE’s volatility index is bouncing on a three-month low.

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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:01

GBP

BRC Shop Price Index YoY (Dec)

-0.3%

A proprietary inflation report, but one that can set the tone for the BoE’s pressure for hikes

0:30

AUD

Job vacancies (Nov)

3.1%

A compliment to the monthly labor statistics report

5:30

AUD

Foreign Reserves (Dec)

A$59.9B