Dollar Mixed, Holiday Lull Has Begun

The US dollar is trading in a mixed fashion as North American participants return to their posts. The breadth of the dollar's decline has narrowed in recent weeks, concentrated primarily against the euro, sterling and currencies that move within their orbits. The greenback has done well against the yen, dollar-bloc and many emerging market currencies. Although the euro and sterling remain near the recent highs, they have lost some momentum, while the dollar-bloc currencies are firmer.

While this seems to be a case of position squaring ahead of the holiday period, there are also some fundamental developments that have encouraged the price action. Turning to the dollar-bloc first, the New Zealand dollar is the strongest of the high-income currencies, gaining about 0.4% against the US dollar, helped by a central bank that sounded a bit more hawkish on rates and somewhat less convincing about resisting its currency strength. The RBNZ offered forward guidance that reaffirmed its commitment to raise rates in early 2014.

The market has gone a long way toward pricing in 50 bp higher cash rate in the first few months of the new year. When it came to the strength of the kiwi, the central bank simply said that it could not be sustained in the long-term. This is a rather milquetoast protest and the market was happy to bid up the New Zealand dollar. Of note, the Aussie fell to new 5-year lows against the kiwi.

Against the US dollar, the New Zealand's downtrend since late-October has not been convincingly violated. The trend line off the October 27, November 18 and November 20 highs is found today near $0.8300. A close above there would help spur a correction toward $0.8400, or a little above.

Australia celebrates the 30th anniversary of its float with the bears taking a respite after a jobs report that keeps rate cut expectations in check. Australia created 21k jobs in November, twice what the market expected, though the October series was revised to show a small loss of jobs from a small gain. Full time positions rose by 15.5k, recovering about half October's loss. The unemployment rate ticked up to 5.8% from 5.7%, though the participation rate remained steady. Separately, Australia reported consumer inflation expectations ticked up to 2.1% in December from 1.9%.

The Australian dollar made new lows for the week, just above $0.9000, which is above last week's low (near $0.8990). The downside momentum has eased, but it will still be difficult for the Aussie to sustain much in the way of upticks. On both Tuesday and Wednesday, the Aussie approached the 20-day moving average. This average, which comes in today near $0.9165, has held back rallies since this phase of the downtrend began in late October. More immediately, the $0.9065-80 may frustrate bottom pickers.

For its part, the Canadian dollar was bid to its best level of the month, in what appears to be simply position squaring after the CAD1.07 held on in two tests last week. It is testing the 20-day moving average for the first time since November 21. It is found near CAD1.0565 today. A break would allow for a test on CAD1.05. We note many large banks have the US dollar rallying next year into the CAD1.14-CAD1.17 area, as the economy lags behind what is expected to be a stronger US expansion.

Ministry of Finance data shows Japanese investors continuing to buy foreign bonds (JPY413 bln), with about a third being financed by the sale of foreign equities and bills. Still, they have been net buyers of foreign bonds for the last nine weeks. Foreign investors continue to buy Japanese shares, and many banks remain bullish Japanese shares for 2014. Non-residents bought almost JPY114 bln of Japanese shares. However, they sold more than four-times more Japanese bills and bonds, making them net sellers of yen (and even more if some of the equity exposure was hedged).

The firmer yen seen yesterday and the weakness of US shares saw the Nikkei fall 1.12% in Tokyo, but buying was again seen on the pullback, and it finished near its highs. It was perhaps helped by the dollar's recovery against the yen. The year's high, set in May near JPY103.75 beckons, while when the JPY102 level was approached, new dollar demand was seen.

While there has been some European data, it is not very inspiring for traders. Italian CPI was soft a 0.7% in November from 0.8% in October, French CPI was also at 0.7%. However, investors are well aware of the euro area's low price pressures. ECB officials have generally played down the risk of deflation. However, Draghi was on the wires emphasizing two points. First, that the ECB has the policy tools to do more if needed. Second, that any new central bank facility, such as a new long-term repo operation, would be linked to new lending, where small and medium sized businesses remain starved.

Many are rightly concerned about the banking sectors capital needs, and there does seem to be support for BBK's Weidmann's position that sovereign bond exposure also should have some capital requirements (though this is not imminent). A revival of the asset-backed security market may be a fruitful course. Along with the forced recapitalization of US banks (under TARP, which was originally supposed to buy toxic assets from the banks), the Federal Reserve's support for the ABS market was also very important in re-opening the capital markets. It also helped re-start lending for auto purchases, for example; translating improvement in the circuit of capital with improvement in the real economy.

Separately, Sweden reported softer headline inflation and a larger rise in unemployment than expected. This is encouraging investors to anticipate a Riksbank rate cut next week. There has been a series of disappointing data and the economy is flirting with deflation. The year-over-year pace rose to 0.1% from -0.1% in October. The market anticipated a slightly larger rise. The core rate is also subdued at 0.7% year-over-year. The unemployment rate ticked up to 8% from 7.9%, matching the highs since May. The euro rose to a new high since H1 2012 near SEK9.075 before seeing some profit-taking. Euro support is now seen near SEK9.02.

The euro also rose to new 4-year highs against the Norwegian krone. The NOK8.45 level had been blocking the euro's advance. This was convincingly violated in North America yesterday. If the break is genuine, it should offer support now.

The key features of the North American session will be the US weekly initial jobless claims and November retail sales. Recall that last week, the initial jobless claims dipped below 300k. This may be premature and a move back above that threshold is likely to have taken place. Meanwhile, strong auto sales will likely produce a strong headline retail sales figure (~0.6%), but other purchases were likely subdued (0.2%).

Yet the resilience of the American consumer will be evident when looking at the measure used for GDP calculations, which excludes auto sales, gasoline and building materials. This measure is expected to be up about 0.3%, which is around the recent average. Consumption rose by 1.4% in Q3, which was the weakest quarterly showing in four years. Our point is that this looks to be a bit of a fluke and consumption appears to be rising at something like twice that pace in Q4.