US Dollar Finds an Impressive Rally Independent of Risk Trends

US Dollar Finds an Impressive Rally Independent of Risk Trends
There is a significant trend that is developing. Over the past four weeks, the US dollar has posted impressive rallies through Friday. What’s more, the last two surges have made real progress for the greenback. However, there are a few questions that need to be asked. How convincing is this strength considering that aside from Friday, the majors have spent their weeks developing general congestion patterns? For an answer, we should pair this quandary with an observation that while the dollar has advanced extensively through the first half of December; general risk appetite is still anchored to a range at the high end of a yearly range. Therefore, we can establish that the greenback is strong enough that it can force the currency market’s most liquid pair (EURUSD) into a meaningful reversal despite the fact that its most influential fundamental driver is stationary. Looking ahead to next week, underlying risk trends will almost certainly play a bigger role in the market’s bearings. Should the other benchmarks for sentiment (the Dow, Treasuries, gold) role over; the amplitude and prevalence of the dollar’s strength will be sharply leveraged. On the other hand, should stability in risk trends evolve once again into an appetite for yield; the cross winds could overwhelm a tentative recovery. We may be looking at a very interesting holiday trading period.

With all attention still on the dollar’s relation to the market binding influence of risk appetite; the economic docket was downplayed. However, with the currency forging its own direction; the data proved to be a significant boon for the tentative advance. The stars would align with a series of releases that all aided the economic outlook. The primary focus for the session was the health of the American consumer. November retail sales and the University of Michigan’s preliminary Consumer Confidence survey for December both spoke to a developing recovery. For the sales report, the headline reading offered a 1.3 percent jump that doubled forecasts. What was truly remarkable about the data, however, was the fact that even excluding the influence of gasoline receipts and car sales, spending still grew 0.6 percent. The sentiment reading was equally impressive. Despite the general trend in employment and wages, the indicator jumped six points to a 73.4 reading – just below highs last seen back on January of 2008. Here, the details show us that the economic conditions figure (a measure of current activity) actually hit a 21-month high while expectations were still relatively restrained. This is a reversal of the norm where expectations far exceed present conditions on the (sometimes unfounded) hope that government intervention and other exogenous forces will make for a better future. Also on the docket, but gleaning less interest; business inventories for October unexpectedly grew 0.2 percent and import-based inflation grew on an annual basis for the first time in 13 months.

Looking ahead to next week, the listings are relatively light. The FOMC rate decision is a media-friendly event; but its impact is likely limited by the lack of flexibility in monetary policy. The consumer-level inflation report will generate greater interest among speculators as the Fed’s self-imposed deadline for potential policy activity approaches. Other notables include: the 3Q current account balance; industrial production; housing starts; and a vote to raise the national debt ceiling in the US to $1.9 trillion. All told, risk trends pose the biggest threat of volatility. 

Euro Looks at a Dense Calendar of Market Moving Indicators Next Week
When the dollar advances, the euro stands to suffer the most. As the primary counterpart to the benchmark currency, the euro has drawn a significant portion of its strength from efforts by global investors looking to diversify away from the ailing greenback. This link has certainly taken its toll on the unit Friday and generally over the past two weeks. Something to keep an eye on going forward, rumors continue to circulate that some European Union members will require coordinated bailouts or may otherwise break from the group. Ireland has already suffered its own crisis, Greece is on the verge of default and Spain’s condition is deteriorating quickly. These countries have few options available to them as they cannot take the traditional route of manipulating their currency or raising debt levels to necessary levels to smooth the transition. If global conditions plateau and these ailing economies cannot naturally find their way out of their conundrum a bail or break is much more likely; and either would certainly be market-moving. However, looking ahead to next week, the economic docket will likely control immediate volatility. The PMI numbers will be the most interesting for their leading influence for growth; but there is also inflation, sentiment and employment data.

Australian Dollar: How Much Premium Does the Aussie Economy Deserve?
There is always a currency that is considered the strongest and one that is considered the weakest among its peers. The Aussie dollar is the former. However, these extremes do not last forever. Eventually, we will come to a point where forecasts for Aussie-based fundamentals will outpace actual activity; or the health of its counterparts will start closing the gap for performance. When will this happen? It is hard to say; but a mixture of speculative interest and data can help put a timetable on things. Next week’s offerings could take us a big step in the right direction. The 3Q GDP release is due early Wednesday morning; and the outlook is for a tempered quarterly pace of growth compared to 2Q.  

Japanese Yen may be the Top Mover Early Next Week on Tankan Report
Policy officials are struggling to put Japan on the pace of sustainable growth that can not only produce expansion but also guide the nation out of its long-lasting deflationary state. Today, data revealed consumer confidence feel for the first time in a year through November from an October 2007 high. In reality, even before the pullback, the gauge was still showing a much greater pool of those reflecting pessimism. Moving ahead to next week, the yen has the potential to be the most active currency Monday thanks to a well-positioned 4Q Tankan report.

British Pound: Inflation Complicating the BoE’s Easy Monetary Policy Stance
The British pound was one of the few majors that were looking at notable economic data Friday; and the release was certainly interesting considering the broader fundamental backdrop. Factory-level inflation data reported a year high 4.0 percent annual pace for goods paid for by producers and a nine-month high 2.9 percent received for finished goods. Looking ahead to next week, we have CPI numbers among other releases; and it is not a stretch of the memory to recall that officials have warned that inflation may breech 3.0 percent in the near-term.

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Written by: John Kicklighter, Currency Strategist for DailyFX.com
E-mail: jkicklighter@dailyfx.com