All falling into place

And so starts a very interesting week for China, the Eurozone, the United States and currency markets as a whole as we wait on some particularly interesting policy. China will find out today whether the IMF deems the yuan suitable enough to become part of its Special Drawing Rights, Thursday is an ECB meeting at which additional easing is not only expected but demanded by analysts while Friday sees the final payrolls announcement of the year and possibly the data calendar’s only real shot of derailing a December rate rise from the Federal Reserve.

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China to join an elite club

As we come to the end of the week, G10 markets are rather quiet with Thanksgiving bloat making itself felt at Friday’s open. With little to focus on within developed economies, most currency pairs are happily trading sideways. Next week is a very interesting one from a currency perspective.

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Dovish hike is coming

The US dollar is on the back foot this morning as markets have begun to look past what will take place at the Federal Reserve’s meeting on December 16th and have now moved to focus on the shift in policy that will occur in the coming years i.e. how quickly subsequent rate rises are also added to the pot.

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China surprised markets and devalued the yuan by 2%, the first devaluation in 20 years. Asia FX traders bought dollars across the board but those moves started to retrace in Europe, except for the Commodity bloc). As of 6:15 am PDT, Aussie was the biggest loser (down 1.2%) followed by kiwi (0.75%) and then the Canadian dollar.(0.60%)

The move, coming as economic growth has flagged and the currency has been under upward pressure from its informal peg to the rising dollar, is in sharp contrast to policy during earlier times of stress when Beijing resisted pressure to devalue. It should help combat an unexpectedly large fall in China’s exports fuelled by the renminbi’s relative strength.
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Oz to me seems like a no-brainer. The Aussie dollar has been beaten down over a commodity slump and a rate decrease by the Reserve Bank of Australia in the face of the ECB’s quantitative easing program. But the real clincher has been the price action over the last few weeks. If you google Aussie currency news, and review the day to day articles, you will get an idea of what I am talking about. It’s enough to give a day-trader whiplash—Aussie dollar fades, Aussie dollar bounces, Aussie dollar beaten down, Aussie dollar rallies…

I call this a good-ole-fashioned consolidation. After almost reaching parity with the USD last summer, the Australian dollar is building a nice base here in the high seventies. Although the currency could obviously fall further against the USD if the world economy (and especially China) slumps further, I believe investors looks for good value should at least start watching the Aussie for a good entry point and maybe even start taking partial positions.
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The Swiss National Bank gave us volatility on a historic scale last week as it rocked markets by abandoning the nearly three-year-old policy of supporting the value of the Swiss franc relative to the euro at 1.20. The Swiss franc consequently appreciated sharply across the board, distorting flows and liquidity market-wide.

While this took the market entirely by surprise, the likelihood is that the SNB’s hand would have been forced in the coming months by European Central Bank quantitative easing. The Swiss National Bank would likely not have enough ammunition to maintain euro/Swiss franc at a level of its choosing in the face of the kind of euro weakness that would inevitably result from eurozone QE.

Continued volatility anticipated

Things are unlikely to settle down too much this week either. The ECB’s meeting is the highlight this week, as the market currently expects the unveiling of a quantitative easing package in a bid to stem deflationary pressures in the eurozone.
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The Australian dollar nursed its losses across the board today as investors pared long positions amid uncertainties about China’s economic growth and weakness in Asian stocks.

The dollar fell as far as $US1.0341, from $US1.0392 in New York, having lost 1 per cent this week. It was last at $US1.0368 and looked set to test last week’s trough of $US1.0336. A break there would take it to levels not seen since January 17.
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The Australian dollar nursed losses against its US counterpart on Monday, weighed by uncertainty over China after the world’s second biggest economy posted a shocking trade deficit.

The shed around third of a cent to buy $US1.0526 in late trade, versus $US1.0567 in New York late Friday.

Traders cited selling from macro-funds, with talk of buying interest all the way down to $US1.0500.
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The Australian dollar jumped back above parity with the greenback as the US currency came under broad selling pressure and equity markets turned higher. The dollar rose to as high as 101.12 US cents in recent trading, a three-week high. It has added more than 1 US cent since its local close of about 99.4 US cents.

Traders say the dollar broke above stops at parity and around US$1.0030. It was also buying almost 77.5 yen, 73.4 euro cents and 64.4 pence. Earlier the Australian dollars cut losses as a sudden turnaround in Chinese stocks and commodity prices helped lift some of the gloom, after the passing of a crucial euro zone bailout fund stalled in Slovakia.

The Aussie, which fell as low as 98.65 US cents, rebounded to 99.40 US cents in late local trade, as China’s Shanghai composite index rallied more than 2 per cent after erasing losses.

Traders said the move was driven by short-covering and talk of sovereign funds buying Chinese stocks. That helped restore risk appetite, which earlier had been sapped by disappointing earnings from Alcoa and news that Slovakia rejected a plan to expand the euro zone rescue fund.

The outgoing Slovak government still expects to be able to enact the measure as a caretaker administration by the end of this week with support from an opposition party.

“Chinese stocks turned around very sharply and copper as well, that saw the Aussie test the topside and take out some shorts,” a trader said. Still, analysts said the antipodean currency faces a tough road ahead with the Aussie battling stiff resistance at parity against the greenback.

Joseph Capurso, strategist at Commonwealth Bank, said the closely watched employment data due on Thursday will be key to the Aussie’s near-term outlook. Analysts polled by Reuters expect the economy to have generated 10,000 jobs in August, keeping the unemployment rate at 5.3 per cent. “If we do get a below-consensus number, I can see the Aussie falling a cent pretty quickly,” he added. A weak number would likely add to speculation the Reserve Bank could cut interest rates in the next few.

Markets paid scant attention to second-tier data on Wednesday, which showed further signs of improvement in the housing market.
Australian debt edged higher, with three-year futures contract up 0.03 points to 96.310 and the 10-year up 0.015 points at 95.655.

U.S. Dollar Trading (USD) strong data and weak commodities sent the Dollar higher across the board. Weekly Jobless Claims dropped to 404k vs. 445k previously. December Home Sales at 5.28m vs. 4.88m previously. In US stocks, DJIA -2 points closing at 11822, S&P -1 points closing at 1280 and NASDAQ -21 points closing at 2704.

The Euro (EUR) held strength better than most with the market bounded between 1.34-3500. News that the Irish PM had called a snap election was overlooked as was a moody downgrade warning of Portugal. EUR/USD traded with a low of 1.3395 and a high of 1.3525 before closing at 1.3460. Looking ahead, January IFO Business Climate forecast at 109.9 vs. 109.9 previously.

The Japanese Yen (JPY) bounced aggressively on strong US jobs and housing data to test Y83 in a widely noticed sigh on strength. Y83.50 has capped the major so far this year and will need to be broken to excite the bulls. Overall the USDJPY traded with a low of 82.04 and a high of 83.15 before closing the day around 82.90 in the New York session.

The Sterling (GBP) was sold back on weak stock markets with UK economic data also weighing. January CBI orders slipped to -16 vs. -3 forecast. Overall the GBP/USD traded with a low of 1.5835 and a high of 1.6013 before closing the day at 1.5910 in the New York session. Looking ahead, December Retail Sales are forecast at -0.3% vs. 0.3%.

The Australian Dollar (AUD) was crushed in the US session as copper fell over 3% and the USD surged on strong data. The tone and mood towards the Aussie has changed markedly with the market finding itself caught long AUD against many pairs. Overall the AUD/USD traded with a low of 0.9830 and a high of 0.9982 before closing the US session at 0.9850.

Oil & Gold (XAU) was crushed lower by the strong USD and EURO. Overall trading with a low of USD$1342 and high of USD $1372 before ending the New York session at USD$1347 an ounce. Oil led the commodity sell off down $2 a barrel. WTI Oil Closed -$1.90 at $89.60 a barrel.