Talking Points:

Dollar: Is the Bullish Taper Drive Running on Fumes?
Euro Will Respond to ECB Whether They Hold or Increase Stimulus
British Pound Strength Eroding as Hike Optimism Fades

Dollar: Is the Bullish Taper Drive Running on Fumes?
A quick look at the Dow Jones FXCM Dollar (ticker = USDollar) reveals the bulls are struggling to keep the control over the market. The index shows the greenback probing the floor of a three-month rising trend channel – a threat of correction reflected equally across EURUSD, AUDUSD and USDJPY. The lack of progress is a fundamental concern. Between the two dominant market themes for the greenback and broader FX market, both risk trends and relative monetary policy should be theoretically offering support to the greenback. And yet, the currency is threatening to suffer a move lower. This difficulty may turn the tide for the currency’s persistent upside drift in otherwise steadfast markets. In other words, the dollar may be prone to a short-term tumble unless something more ‘dramatic’ happens.

The safe haven’s best chance to forge a meaningful rally from its recent lull would be the realization of another wave of ‘risk aversion’. The S&P 500 as a benchmark for global equities and general investor sentiment has stalled just above a trendline that has maintained the current bull phase since the beginning of 2013. However, depending on such an extraordinary volatility event is synonymous with positioning for a low probability outcome. Furthermore, we have seen the currency’s sensitivity to risk moves dampen such that its correlation to the FX Volatility Index is essentially at zero. That means a sentiment-based move would need to be strong to reengage the dollar.

Outside of the ‘risk-on / risk-off’ theme, the dollar’s steadfast driver (relative monetary policy) is losing its inherent bias. Since the FOMC’s first Taper on December 18 – which was followed by another tightening move on January 29 – the USDollar is virtually unchanged. And this is certainly not a function of dovish sentiment bleeding in. Philadelphia Fed President Plosser remarked this past session that the pace of cuts may need to be accelerated, while Atlanta Fed President Lockhart said the $10 billion trimming was now ‘default’. Tangibledata like Friday’s NFPs may amplify speculation, but the more effective means may be relative dovish shifts by counterparts like the ECB, BOJ and BoE.

Euro Will Respond to ECB Whether They Hold or Increase Stimulus
The European Central Bank’s balance sheet (a measure of its stimulus contribution) is at a more-than-two-year low having dropped nearly 30 percent from its June 2012 peak. In stable financial markets, that is a considerable source of strength for the Euro. Against a backdrop of steady or expanding stimulus programs from major counterparts, this relatively ‘austere’ bearing boosts market rates and supports speculation of more timely rate hikes – a fundamental element for pricing currency. Yet, neither global nor local conditions in the Eurozone are particularly robust. And, the tepid growth outlook, dubious banking system’s health and sovereign exits from rescue programs are generating concern.

Heading into Thursday’s ECB rate decision, speculation of a dovish policy move has gained significant traction – though perhaps not enough to mitigate a negative Euro reaction to an actual easing effort. Looking to index swaps, the market is pricing in a little chance of a rate cut; while the 12-month outlook is at its lowest level in 14 months. That said, the central bank has discussed the option of a negative deposit rate in the past – an experimental move. More effective for financial conditions – and Euro bearish – would be a new LTRO-like effort.

British Pound Strength Eroding as Hike Optimism Fades
The ‘other’ monetary policy decision of note in the upcoming trading session will be the Bank of England’s (BoE) meeting. There is serious fundamental disconnect between the policy group’s most recent guidance and the market’s expectations. Looking to the sterling and yields, the market is pricing in a 2014 rate hike; which stands in direct contrast to the central bank’s 2015 timetable. A quick tumble in the jobless rate to near the MPC’s target 7.0 percent jobless rate is the culprit. Unfortunately, no policy change results in no tangible statement.

Yen Crosses Implied Volatility Levels Refuse Bullish Outlook
Yen crosses outperform when the risk of exchange rate volatility is low and declining. Why? Steady rates reduce the risk of capital losses that would quickly overwhelm historically thin carry from these pairs. Yet, while equity markets have steadied, we find the market’s poise has not immediately improved. In fact, looking at 1-week (short-term) implied volatility on USDJPY; fear is holding at 2-monthhighs.

Australian Dollar Responds to Positive Data, Building Rate Outlook
An unloved carry currency may be slowly finding its legs. Though the first RBA rate hike may be over the horizon, the 12-month forecast from swaps is pricing in 16 bps worth of tightening – not far off the two-and-a-half year highs set in November. In the meantime, this morning’s docket reported a two year high A$468 million trade surplus, 0.9 percent 4Q retail sales increase and near 3-year high 4Q business survey.

Canadian Dollar Needs Trade, Business Activity Reports to Muster Recovery
The Canadian dollar has taken the wind out of the USDCAD’s persistent bullish run. The loonie has suffered substantially since the new BoC Governor (Poloz) took the helm and introduced a more dovish outlook. Beyond having adjusted to this move away from the eventual hike that Carney led speculators to expect, we also see some anticipation in the next 48 hours of data: trade, business activity and jobs statistics.

Emerging Markets Notably Unrepentant, Mexican Peso Jumps
So far this week, most Emerging Market currencies have put in for significant recovery moves against the safe haven US dollar. However, that exchange rate stabilization doesn’t seem to be drawing capital back into the troubled group. The MSCI ETF is hovering perilously just off 7-month lows with unconvincing volume supporting ‘recovery’ days. Meanwhile, the Mexican peso jumped with an unexpected Moody’s upgrade.

Gold Jumps on US Jobs Data, Unable to Hit Breakout Velocity
A sharp month-over-month drop in the US ADP payrolls report led to a 1.3 percent intraday rally for gold. Yet the metal was unable to hold those gains for very long. This response was far more severe than what we had seen in either the USDollar or equity futures. If this were a significant catalyst for risk trends or influence for the change to Taper expectations, it would be a more pervasive. And again, gold holds below $1,275.
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ECONOMIC DATA

GMT

Currency

Release

Survey

Comments

0:30

AUD

Trade Balance (Australian dollar) (DEC)

-225M

-118M

The previous print was the second best since 2011.

0:30

AUD

Retail Sales s.a. (MoM) (DEC)

0.5%

0.7%

A beat here would support likely support the Aussi well following this week’s RBA spike.

0:30

AUD

Retail Sales ex Inflation(QoQ) (4Q)

1.2%

0.7%

0:30

AUD

NAB Business Confidence (4Q)

6:45

CHF

SECO Consumer Confidence (JAN)

-1

-5

Switzerland has not had a negative trade balance figure since 2005.

7:00

CHF

Trade Balance (Swiss franc) (DEC)

2.11B

7:00

CHF

Exports (MoM) (DEC)

4.2%

7:00

CHF

Imports (MoM) (DEC)

6.8%

8:00

Philippines Central Bank Rate Decision