Dollar Climb Overshadowed By EUR/USD Push Above 1.3300

How did the dollar perform this past week? That is a straightforward question, but answers will vary depending on who is analyzing the currency. To many, the greenback tumbled this past week. Indeed, on a week-over-week basis, the dollar was lower against all majors with the exception of the Japanese yen. On the other hand, if we were looking at anything other than a standard "range swing," only the euro posted a meaningful advance.

In fact, through Friday, only EUR/USD printed a dollar decline with the pair making a follow through push to overtake the 1.3300 and close at a nine-month high. In contrast, the benchmark currency actually made gains against the pound, Australian dollar and New Zealand dollar. For the equal-weighted Dow Jones FXCM Dollar Index this converted to a Friday advance and higher low on the week.

The dollar’s performance was another contradictory outcome to the general assumption that sentiment enjoyed a serious advance this past week. Sensationalist bulls calling a renewed risk appetite phase – and conversely a dollar retreat – would point to the S&P 500’s five-year high close on the week, carry-heavy yen crosses soaring and of course the EURUSD. Yet, the equity index only advanced 0.4 percent, the yen crosses are moving on the yen’s own rapid depreciation and the correlation of the market’s favored risk-sensitive benchmarks has relaxed. This isn’t to mean that risk trends won’t spark or that the dollar will suffer under different circumstances. Instead, it implies we still await a driver.

Through the end of this past week, we were given our first taste of a bigger event risk moving forward. The headline earnings of both the American Express and Wells Fargo 4Q earnings figures beat analyst expectations; but the former came with layoffs and a hearty charge off, while the latter reported record capital hoarding (rather than charging economic activity by lending). Details will be important as we watch the earnings season heat up this week with a heavy round of financial firms reporting (JPMorgan, Bank of America and Citibank amongst others).

A more concentrated catalyst will be the Chinese GDP report, though its late-in-the-week release could curb trend development rather than aid it. As we watch these scheduled releases, we should also keep an eye on a more distant concern: the eventual exit of stimulus. The last Fed minutes revealed expectations for the QE3 program to end before the end of the year. And, there are plenty of Fed speakers this week.

Euro Rallies With its Best Performance Against Aussie Dollar
Tail Risk. That is a phrase that all euro traders should be familiar with by this point. The jargon refers to a low probability scenario with a severe impact. Having suffered through nearly three years of a drawn out financial and debt crisis, the euro has proven the poster child of tail risk. Yet, as the currency suffers through the fear and uncertainty building, it will also rebound and revive when the threat is seen to dissipate. That is the stage we seem to be in currently.

Since Greece managed to secure funding through the end of last year, the immediate threat was withdrawn and the region’s debt markets have thawed. Recently, there have even been proactive fundamental developments. The most recent headline was Greece’s Parliament approving a "mini" tax bill late Friday to raise revenue estimated to be over €1 billion. Coupled with possibility that Spain will drop seniority status on the regional rescue program (which helped a strong bond sale along last week), these raise the water mark on euro relief. However, there are still issues that are incubating. Particularly concerning is Cyprus which is looking for a Greece-level rescue.

Japanese Yen Secures Ninth Consecutive Week of Decline
USD/JPY – along with the other yen crosses – closed the week on a strong footing. Over the past two months alone, the yen has fallen between 12 and 18 percent against its most liquid counterparts. What is more impressive than the net move is its consistency. The statistics are particularly incredible for USD/JPY which has now risen nine consecutive weeks which is a trend not matched in 24 years.

This move certainly has a lot of life to play out through 2013 as Japan embarks on the kind of devaluation effort that crushed the US dollar back in 2008 and 2009, but that doesn’t mean it will be a linear move. The government made its move and the BoJ isn’t on until the 21st. Beware risk aversion.

Australian Dollar Traders Awaiting Chinese GDP, Aussie Employment
There is plenty of event risk for the Aussie dollar traders to watch for through the coming week. Lending figures, consumer confidence and inflation expectations are notable; but the employment figure for December carries the greatest potential for volatility. A significant surprise (the outcome deviates from the market consensus) can certainly generate short-term volatility. However, experienced traders know that the greatest potential for this high-yielder is in the Friday Chinese data. The 4Q GDP is top risk, but we should also take in the retail, factory and investment data.

New Zealand Dollar May Face Trouble if 4Q CPI Doesn’t Rebound
The Reserve Bank of New Zealand has maintained a persistent, hawkish tone even though inflation figures have backed off well below target last year. Policy officials target medium-term price pressures, so there is room to temporarily overlook a lull in inflation. However, set too low for too long and action must be taken. There is a pickup expected in the annual 4Q CPI reading next week (0.8 to 1.2 percent). If it misses…

Swiss Franc: EUR/CHF Moves to 12-Month High 1.2200
There is no one that is more relieved by reduced euro-area tail risk than the Swiss National Bank (SNB). The central bank has struggled to keep the EUR/CHF’s 1.2000-floor in place for much of the past year, but we are starting to see a more permanent buoyancy off that artificial level. The final two days of last week in fact showed a 100-plus pip rally and a close at 12-month highs. If euro-area troubl returns, though, back to 1.2000.