Dollar Awaits Clear Risk Bearing, EUR/USD Eyes 1.3000

With the exception of USD/JPY, the dollar managed to put in for an advance against all of its major pairings Tuesday. That said, the advance was clearly tepid. The market was holding its breath through the trading day as US equity futures were slowly starting to pullback – threatening a sharper retracement of the post Fiscal Cliff "resolution" rally. That stumble never fully developed, however, as there was no stand out catalyst to promote it.

Data for the day (such as the NFIB small business sentiment report and consumer credit figure) lacked the influence to commandeer sentiment. The best chance for a known spark to put speculative trends in motion was a surprise 4Q earnings report from Blue-Chip firm Alcoa. The $0.06 earnings-per-share figure came right in line and clearly did not cater to the weight of uncertainty that threatens to spur risk aversion.

The US corporate earnings season is still a notable risk to speculative stability moving forward, and is therefore a possible point of volatility for the dollar. Yet, the next notable report isn’t scheduled until Friday (Wells Fargo at 13:00 GMT). In the meantime, we will have to look for other drivers: QE3 exit fears, debt ceiling concerns, purely market-based moves. Even the ECB decision can spur the dollar.

Japanese Yen Posts Biggest Rally in Over Four Months
That’s not something we have seen from the yen in a long time: a serious surge. The currency rallied between 1.2 and 0.83 percent against its benchmark counterparts Tuesday. In fact, the 0.8 percent slump for USD/JPY was the biggest we have seen from this pair since August 22.

This yen advance is particularly remarkable considering it comes directly after Japanese Finance Minister Aso announced the government’s intention to buy ESM bonds in Europe - a means for actively manipulating its currency while simultaneously short circuiting its trade partner’s ire. It is tempting to take this as a particularly glaring signal of a turn for a currency (the yen) that is extremely oversold across the board.

However, we must be careful as this a modest correction in a strong trend that is backed by both carry and a vow to forcefully depreciate the currency’s value. The government is expected to announce a budget extension on Friday and the BoJ is on for January 22, but the next move is likely risk-based.

Euro Draws Little Strength From ESM Bond Sale, Japan Interest, Data
There was a lot going on euro’s newsfeed Tuesday. Top event risk was the European Stability Mechanism’s (ESM) debt sale. Taking over for the EFSF, the rescue fund sold €1.927 billion in three-month bills and investors paid 0.0324 percent for the privilege to lend to the group.

This is a sign of relative strength for the fund, but it is also a sign that investors are still seeking out safe havens for capital (a notable consideration when we see Greece’s debt auction pulled slightly better yields and Ireland had a "successful" auction of 2017 notes). The ESM sale was no doubt helped out by Japan’s announcement that it would buy the debt going forward. This should not be read as a serious, bullish development, just as the round of data (jobless rate at record high against modestly better sentiment indicators) comes with serious caveats.

Australian Dollar Absorbs Data Quickly, Yield Resisting Risk Trend Concerns
Following on the heels of the worst trade deficit since 2008 reported yesterday, the Australian docket posted a 4.7 percent pickup in November new home sales (second largest in two years), a 0.1 percent slip in November retail sales and 6.9 percent plunge in job vacancies (the biggest since 2001). The mix was worth of a 40 pip, peak-to-trough stumble from AUD/USD and little more.

To revive a serious trend, we need to see a clear bearing on risk appetite to either bolster the demand for yield or panic those that are collecting nickels in front of the steamroller. Yet, if it is risk aversion that we see next, the Aussie dollar is a little better buffered to the headwinds than before. Since the start of the year, the market’s expectation of another 25 bp rate cut from the RBA at the next meeting dropped by 20 percentage points (now at 40 percent).

British Pound Drops Across the Board as Gilt Yields Slide, Growth Outlook Improves
On a day that was relatively restrained for serious swings in speculative appetites and FX trends, the British pound stood out for a drop against all of its major counterparts. That uniform decline is evidence of an inherent weakness for the currency. Form the economic calendar, only the BRC’s sales figures pops up.

The 0.3 percent increase for the December reading was weaker than expected and the survey projected weakness through 2013, but this data hardly carries serious influence. Far more interesting is what was happening to Gilt yields (a benchmark measure for returns for currencies). While most government bond rates fell; the UK’s were particularly steep, extending a tumble from April highs.

New Zealand Dollar Looks to Trade Data Ahead
Early Wednesday morning, the kiwi stumbled following the release of a sharper than expected 5.4 percent drop in building permits through the month of November. This curbs expectations that the rebuilding effort in New Zealand will add as much to growth as projected by Finance Minister English and Reserve Bank of New Zealand Governor Wheeler. A bear could say that this is evidence that the central bank could take a more dovish shift going forward – but that would be a considerable stretch.

The data was met with a move was less than 20 pips deep before standard risk trends took over. The upcoming session, however, presents a data point with more clout: the November Trade balance. For growth, exports is far more critical a contributor. Though if we are to see anything resembling a medium-term trend, the kiwi needs risk trends.