Dollar Failed To Rally Despite Solid Data

In spite of a string of strong economic data from US, the dollar failed to stage a solid rally against other major currencies last week. The dollar index extended recent choppy decline to close at 80.315. down from prior week's 80.645. Stocks also rebounded after initial dip. DOW rebounded strongly after dropping to as low as 15791.29 and closed above 16000 handle at 16020.20. S&P 500 also closed back above 1800 level at 1805.09. Long term treasury yield closed higher with 30 year yield at new high of 3.917%. 10 year yield also closed higher at 2.883% but is staying below 2013 high of 2.979%.

The string of solid economic data including strong Q3 GDP upward revision, upside surprise in ISM manufacturing and a robust NFP report which showed over 200k of growth in November. Unemployment rate unexpectedly dropped to a five year low of 7% versus expectation of 7.2%. The data reinforced the case that Fed would taper the asset purchases sooner rather than later than the base case as in March meeting. And admittedly, there were increased speculations that tapering would start in December. However, it must be emphasized that the majority are still expecting Fed to stand pat this month. According to a Bloomberg survey, 34% of economists expected December tapering, up from 17% a month ago. But that was way off 50%, not to mention that it's far from being a consensus.

Meanwhile, markets seemed to have gotten the message from Fed that it's only slowing the pace of purchases rather than beginning tightening. And the tremendous amount of stimulus would stay in place. The long term treasury yields strengthened on expectation that tightening will eventually occur based on that time frame. But, at the same time, stocks are still in up trend as the economy will continue to enjoy stimulus. Fed officials also mentioned the need of providing a time table for reversing the stimulus with the announcement of tapering when happens to smooth the impact to the markets. We won't probably see a broad based reversal in dollar until getting a precise schedule of tapering.

Elsewhere, the euro strengthened against most major currencies as ECB president Draghi sounded less dovish than expected in the post meeting press conference. The Swiss franc was even stronger as inflation jumped to more than 2 year high of 0.1% yoy in November. New Zealand dollar was the strongest currency on expectation that RBNZ would be forced to raise rates next year to curb housing bubble. The yen was broadly lower, as the weakest currency on risk appetite and expectation of additional stimulus from BoJ next year. Canadian dollar was the second weakest currency after a dovish BoC statement. The dollar, Sterling and Aussie were mixed.

Technically, yen continued to defied our expectation with sustaining selling pressure. But we'd stay skeptical on near term as the Japanese currency is in deep oversold condition. European majors are staying in near term uptrend against the greenback. While Sterling was overshadowed last week, GBP/USD is still having the clearest bullishness. We're not anticipating an acceleration in USD/CHF downtrend below 0.88 as EUR/CHF 1.2 floor would limit Swissy's strength. We'd prefer to see acceleration in EUR/USD and a break of 1.3832 resistance before having a bullish stance in the pair. Aussie and Canadian dollar were weak but showed some sign of loss of momentum against the greenback. We'd be skeptical on downside potential in both currencies.

Our strategy of the AUD/USD short was correct last week but as the pair is losing downside momentum, we'll close it out first. The EUR/USD short was not triggered as the pair was contained above mentioned 1.3520 support despite an intra-week fall. We'd buy the GBP/USD this week as the consolidation pattern from 1.6442 might finish soon. Preferable entry point is 1.63 with stop at 1.62. But in case of early strength, we'd buy earlier with a tighter stop. Break of 1.6442 is anticipated in near term.