daily fundamentals

US Dollar at the Verge of its Next Bull Leg but CPI Data and FOMC Commentary Fail to Catalyze

•    Euro: Growth Outlook Improves, ECB Ends a Key Emergency Stimulus Program
•    British Pound Rallies on Surprise Jobs Growth
•    Canadian Dollar Gets its Turn with Inflation Data

US Dollar at the Verge of its Next Bull Leg but CPI Data and FOMC Commentary Fail to Catalyze
Taking stock of the whole week, the scheduled US event risk for Wednesday was arguably the most fundamentally charged. However, despite the presence of big ticket economic indicators; the greenback would end the day on moderate volatility and make no meaningful progress towards the bigger debate of whether the dollar has indeed reversed course or is relieving pressure with a much-needed retracement on a year-long bear trend. To this point, much of the currency’s gains can be attributed to its closely monitored relation to risk appetite. In the past two months, sentiment has stalled but not yet reversed course (this can best be seen in the consummate investor confidence gauge – the Dow Jones Industrial Average). Such a lengthy break opens the doors to fundamental trends that were relegated to the background when risk trends grew in prominence; and it also encourages profit taking after the steady buildup in speculative positions through most of the year. However, now EURUSD stands on the brink of its next meaningful decline; and time is running out lethargy of holiday trading conditions fast approaching.

While today’s top economic indicators and events would encourage little immediate volatility; they nonetheless were key milestones for the dollar’s primary fundamental drivers. Through the morning hours of the New York session, the consumer price index (CPI) figures were top billing. Interest rate speculation has been a heated topic for market participants; but the pressure for hikes from the Federal Reserve has been sedate at best because officials have focused on supporting the economic recovery. However, the world’s largest economy is already showing progress in its return to growth; and the central bank has taken blatant - if small - steps towards withdrawing stimulus through emergency programs. Making the leap from unwinding emergency aid to passing interest hikes will most likely fall to inflation. Until today, the front-line annual inflation gauge was negative for eight consecutive months. Yet, according to the government’s report, price growth through November would jump to a 1.8 percent clip to push this gauge right back up to the central bank’s target. This data’s influence is somewhat diminished by the fact that most of the pressure was from energy products and the reading itself was in line with the consensus. Nevertheless, the pressure is tangible and comes at a critical stage in the Fed’s policy standing. Now that there is a meaningful case on both sides of the policy argument, where do officials stand? On its face, the FOMC rate decision; it was business as usual. There was no change to the benchmark lending rate (not a surprise); and within the commentary that accompanied the decision, the group reiterated its intention to keep rates “exceptionally low” for an “extended period.” This kind of rhetoric would seem to defuse the potential for a rate hike; but its ambiguity and the firm expiration date of February 1st for special liquidity facilities keep the door open to speculation. The markets are still pricing in 85 basis points worth of hikes over the coming 12 months – on par with the ECB outlook and not far from the current forecast for the RBA.

Among the other notable reports and figures for the day, the US House of Representatives approved a $290 billion increase to the cap on government debt as well as a $154 billion economic aid package. Both of these bills will require a go ahead from the Senate. From the docket, housing starts fell exactly in line with expectations at 574,000-unit pace; but the data was nonetheless reflective of stabilization in an important sector. Also, the third quarter current account balance didn’t make the easy connection between a weak currency and strong trade. The deficit grew to a $108 billion shortfall from a second quarter reading that was at its best level in seven years.

Euro: Growth Outlook Improves, ECB Ends a Key Emergency Stimulus Program
Standard fundamentals proved a boon to the euro Wednesday; but risk considerations would once again find their way into price action. Outside of the economy docket, the market was reminded of the instability in the region’s financial health after Standard & Poor’s downgraded Greece’s long-term sovereign credit rating. Deficits, unemployment, and a rigid policy approach are major concerns for the amalgamated economic unit. The probability of a member withdrawing from the Union is higher than many may suspect. In contrast, the ECB took another step in the hawkish direction after it completed its final unlimited, 12 month loan auction at record low rates. The tender extended 96.9 billion euros to 224 banks. For the docket, data was uniformly bullish. The monthly purchasing manager indexes for the Euro Zone and larger member economies are a good proxy for broader growth. Most of the advanced December readings were better than expected; and the Euro Zone Composite figure pushed to its highest level since October of 2007. While it may be measured; the outlook for growth is still tangible. The other notable release through the session was the Euro Zone CPI figures for November. Unlike the US readings, the European number missed forecasts with a 0.5 percent rate.

British Pound Rallies on Surprise Jobs Growth
The pound rallied through the European session Wednesday thanks to a single prominent economic indicator: the jobless claims for November. According to the Office for National Statistics, the labor data improved for the first time since February of 2008. The 6,300 drop is a first step towards stabilizing consumer spending and gradually charge economic expansion. However, it is still very early to qualify a change of trend for this critical economic driver. For a dose of reality, the claimant count rate (though falling short of expectations and finding a favorable revision to the previous month) is still at a 12 year high of 5.0 percent. This is an early step towards economic recovery; something that still weighs heavily with speculators considering the United Kingdom is well behind its peers. Also on the wires, BoE member Miles commented that it was “perfectly natural” to consider changes to the deposit rate going forward. An adjustment to this policy tool has been batted around for a while as a means to encourage lending. Nonetheless decreasing the rate would be another step in the dovish direction.

Canadian Dollar Gets its Turn with Inflation Data
Event risk over the final 48 hours of this trading week is relatively light. However, among the top releases on deck is the Canadian consumer inflation statistics for November. The Bank of Canada to this point has shown no desire to raise rates anytime in the immediate future; but herein lies the potential for speculation. When the first signs of turning the corner are read through commentary, the market will react most aggressively. The headline, year-over-year figure is expected to rise from 0.1 percent to 0.8 percent. This is still well short of the bank’s target.

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