Talking Points:

Dollar Volatility Falls Back to Breakout Warning Levels
Euro Pushes EURUSD to 1.3600 as Inflation Eases ECB Speculation
Yen Crosses Ready for Data Run, Stimulus Speculation

Dollar Volatility Falls Back to Breakout Warning Levels
While EURUSD and GBPUSD offered up the dollar notable losses, the benchmark currency on a market-wide basis was little changed through this past session. That is to be expected with both risk trends and Fed Taper speculation on hold during the holiday trading period. As would be expected of this lull, we have seen activity levels (measured rudimentarily via the average true range) drop to lows not seen since October16. The comparison is an appropriate one as that previous period of quiet preceded a meaningful breakout and trend development for the benchmark currency. Yet, a ‘breakout’ in these market conditions is not enough to derive a meaningful trade from – much less develop the foundation for a lasting momentum. We need fundamental backing that may not emerge until next week.

As always, the greatest potential for the dollar and markets at large is a possible change in risk trends. Looking to the S&P 500 as a barometer for investor sentiment, we see congestion that look suspiciously prone to a jump start of its own. A downdraft in risk appetite could blow a wide hole in the market – and generate a serious bid for the dollar – but that lean has continuously eluded us. Furthermore, we will enter the final trading month of the year next week, and December is historically the best month for US equity gains. Looking at the docket, there are a few bottom-tier indicators scheduled for release; but the real interest is in what we will find next week. Manufacturing, housing, services and trade figures are all important; but the stimulus wars for the global economy will ensure Friday’s employment statistics (NFPs and jobless rate) are the market’s primary focus.

Euro Pushes EURUSD to 1.3600 as Inflation Eases ECB Speculation
The euro managed to gain enough traction this past session to push EURUSD 1.3600. The performance was noteworthy in part because the fundamentals were uneven. On the docket, we were presented with a 10,000-payroll increase in German Unemployment which was worse than expected. Alternatively, Euro-area confidence indicators showed a pick up in the first readings of economic and business sentiment. The market’s real interest, however, rested in the German inflation figures. As the largest economy in the region, Germany’s health is seen as a guide for Europe. That is encouraging for rate watchers who witnessed an unexpected pick up in the November CPI figures. The 1.3 percent core reading curbed a steady deflating trend while the 1.6 percent core reading was the biggest beat in years.

This data carries particular weight because the upcoming session brings the same two data series that led the market to sell the Euro off aggressively last month: the Eurozone CPI and employment figures (10:00 GMT). This scenario is remarkably similar to what we witnessed last month…and the stakes are higher. With the ECB rate decision due next week and the market still reeling from the surprise rate cut at the last meeting, speculation is now turning to the possibility for more stimulus out of Europe which would materially undermine the currency’s recent appreciation. If the inflation report is softer than expected, it would significantly amplify expectations for another LTRO-like program to replace the stimulus effort that is currently being reduced.

Yen Crosses Ready for Data Run, Stimulus Speculation
A dense round of event risk is scheduled for the Japanese yen this morning, and the market is more than willing to pick back up an important fundamental theme for the currency: stimulus. The yen crosses are up across the board for the month (GBPJPY leading the charge with a 6.0 percent advance) due in large part to expectations that the Bank of Japan will offer a follow up stimulus program to this past April’s unprecedented injection. A situation that is remarkably similar to the epic advance in these crosses the same time a year ago in anticipation of the same fundamentals we see now, the market is absorbing all evidence of new stimulus. This morning’s unemployment rate, household spending, manufacturing activity and especially inflation data will help improve the probability scheme for this speculation. If the National CPI figure picks up materially above the 1.1 percent pace, it could feed fear that the second round of stimulus may not be needed. Alternatively, a miss only solidifies the need and pushes for a nearer time frame.

British Pound Muscles Higher after BoE Financial Stability Report
Bank of England Governor Carney delivered the policy group’s Financial Stability Report Thursday. The report noted stability risks from debt levels on the sovereign and household level, but the authority didn’t seem too concerned with an imminent threat. What many were latched on to was the Funds for Lending Scheme’s alternation such that it would not be used to fund mortgage lending – a step to curb the bubble they do not see. This is a dubious move in its ability to cool what is undoubtedly a problem, but the market took it as a positive step regardless. GBPUSD extended its move – though moderately – above 1.6250. Coming up, we have lending figures and mortgage approvals.

Canadian Dollar Steady Through Trade Miss, Unlikely to Write Off GDP So Readily
Canada’s current account deficit was larger in the third quarter than was expected. The C$15.5 billion shortfall missed expectations to tighten and the previous reads was increased. That being said, the currency managed to hold steady. It will be more difficult to overlook the upcoming data: September and 3Q GDP figures. For CAD pairs with immediate breakout risk, this could be interesting.

Australian Dollar Finally Posts Positive Day, But Will Rate Forecasts Stick?
The Australian dollar was up against all of its counterparts this past session, but there was little momentum behind the bullish endeavor. AUDUSD’s first advance in seven trading days is a good allegory for the individual currency’s performance – pushed consistently lower, there was room for moderation. Rate expectations are still the currency’s best opportunity for gains moving forward and the RBA is due next week.

Gold Carves Wide Range in Holiday Trade, But Still Missing Momentum
A $22.19-range for gold was notable given the holiday-dampened trading conditions. However, an increase in intraday activity didn’t offer the metal a meaningful bearing one way or the other. The market will weigh anti-currency sentiment in the upcoming session with the Eurozone inflation data, but the real interest is fixed on Fed Taper speculation next week related to the NFPs.

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