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Dollar Volatility Balloons to Start the Year, Risk Trends Next?

Dollar Volatility Balloons to Start the Year, Risk Trends Next?

John Kicklighter, Chief Strategist

Talking Points:

• The Dollar's first week of 2017 has proven very volatile with a dramatic swing capped with an NFP-promoted rally

• Risk trends have extended their climb but the Dow's failure to top 20,000 defines the troubled progression

• Speculative waves are growing larger from scheduled event risk to key themes to unscheduled headlines

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Depending on what markets and benchmarks you track, the opening week of the new year either looked like a consistent but measured status quo or a dramatic shot of volatility. From the world's most liquid currency - the Dollar - what started out as defused effort to break to fresh 14 year highs turned into a near 2.5 percent tumble. Yet, the bearish reversal that this could have turned into was halted by a December US labor report that would keep the embers of hawkish 2017 rate speculation glowing. As the world's most liquid currency, the heavy waves the Greenback generated were felt from EUR/USD to USD/JPY to even further removed crosses. The CBOE's volatility index for EUR/USD reflects the tumultuous conditions. The question is what next salvo spreads or dramatically amplifies the anxiety.

In contrast to the FX majors, the traditional risk-leaning standards seemed to have readily returned to the complacency that capped conviction before the holiday's drained liquidity into the end of 2016. The S&P 500 spot index may have marked a new record high through the week's close, but there was little drive behind the technical advance. A good proxy for the sentiment directing these markets is the Dow Jones Industrial Average. The long-popular equity index has held tantilizing close to the round 20,000 while defiantly refusing to finally break the spell it seems to hold over market participants. Keeping this ill-earned optimism growing looks increasingly dubious as uneven economic data competes with anti-trade and anti-cooperation for top financial headlines.

Looking ahead to the coming week, liquidity will further fill out as we dive further into 2017. However, that doesn't ensure a clear sense of conviction amongst the trading ranks. There is plenty of data on the docket including key global trade figures, inflation pressures and the important University of Michigan consumer sentiment survey. These updates will tap well-defined fundamental themes like US rate forecasts. Such themes will represent influence on a grander scale. Both the disparity betwen the Fed's forecasts to the market's own views of where rates will be in a year's time and the asymmetry in risk trends potential are two deeply rooted driver. Then there are the surprise developments that may prove the greatest threat to the fragile calm the market has attempted to keep for months. Policy tweets from the incoming US President and clear evidence of FX intervention for countries like China are dynamics that could easily drive fear. We discuss the unease to start the new trading year in this weekend Trading Video.

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