Dollar Fights For An Advance In Face Of Stimulus, Downgraded Headlines

EUR/USD may have put in for its first drop in four trading days while USD/JPY finds itself in its steepest bear leg in two months, but that doesn’t mean that the dollar itself is doing particularly well. From the equally-weighted Dow Jones FXCM Dollar Index, we find that the greenback was little moved on the day.

For fundamental flashes, the dollar felt a modest shudder on credit rating agency Fitch’s warning that the US could lose its AAA-status if the brinkmanship continued for raising the nation’s debt ceiling. Alternatively, stimulus watchers read comments from the Fed’s Rosengren who said strong growth could curb quantitative easing 6-9 months before the jobless rate hit the 6.5 percent target. These are notable hiccups, but they are unlikely to carry last trend. For that we need a risk appetite shift. Can earnings provide?

Euro Drops to 1.3300 after Officials Says "Dangerously High"
Another wave of euro headlines crossed the wires this past session; but this time, the currency actually reacted to the fundamental push. Given its rarity and the proximate timing of the market’s selling, the most influence of the session’s updates was from Eurogroup Chairman Juncker. Typically voicing his confidence about dubious bailout plans and growth projections, Juncker took a negative tack during the US trading session when he said that the euro exchange rates were "dangerously high."

Anyone that has traded any yen crosses for any length of time would think that this was a rather tame statement (Japanese officials are notorious for their threats and belief on the yen’s bearings). However, such comments from Euro officials are unusual; and Juncker and crew have proven themselves more aggressive in adapting policy to meet concerns.

In reality, these offhand comments are a catalyst, but their market-moving influence would quickly dry up without supporting concerns. On that note, Fitch warned France of a downgrade, Spain’s Rajoy wrote off a rescue again and Germany’s Schaeuble said Cyprus needs Russian aid.

Japanese Yen Rallies Most in Two Months, Trend Still Lacking
We have been here before. Early in Wednesday’s trading session, we find the Japanese yen gaining ground against all of its counterparts – following through on the quick rally won through the previous session. This looks a lot like the pullback from the yen crosses last week which notably stilled and prompted the market to return to its aggressive yen-selling ways after the government announced a 10.3 trillion yen stimulus program.

Prime Minister Abe and Finance Minister Aso have already used their move and have little to coax the multi-month yen depreciation move other than threats. The next tangible catalyst (outside of risk trends) comes January 22 when the BoJ announces its policy decisions. Until then, we are left to the wiles of broader risk trends. Absent any outside influence, a natural correction is a strong draw.

Swiss Franc Extends its Longest Tumble Versus Euro Since 2007
An over-extended currency is naturally prone to a normalizing move – just look at the Japanese yen, both its multi-month rally and recent pullback fit the bill. The Swiss franc is no exception, though it has been more difficult to gauge given there was an artificial floor on its benchmark pairing (EUR/CHF) at 1.2000 that obscured where the balance of power was.

A reduction of Eurozone tail risk is a fundamental factor that carries exceptional weight for this benchmark pair specifically. The immediacy of the economic region’s collapse has certainly eased, and subsequently the capital flow into the banking system has waned. Yet, those fears are not resolved, and this catalyst will lose its momentum rather quickly. This past session’s EUR/CHF was materially slower than Monday’s – the biggest since November 2011. That said, it also notched a seventh consecutive daily advance – the longest run since April 2007. This EUR/CHF trend will break, but other franc moves may carry.

Australian Dollar Ready to Force Breakouts if Jobs Data Sparks Volatility
Typically, the Australian dollar stands out for its volatility. So far this week, the currency is conspicuous for its lack of movement. Where we have seen a EUR/USD tumble, AUD/USD has held close to 1.0600. In a market-wide yen rally, the Aussie dollar has posted the second smallest loss (next to the USD) against the recovering currency. This is yet more evidence that risk trends are not playing a serious role in the underlying markets at the moment.

Yet, that sloth may be shed in the coming session. Much of the FX market’s volatility has been sourced in unique catalysts. As it happens, we have the Australian employment data for December on deck (00:30 GMT). There is plenty of room for surprise in the change and unemployment rate (seen jumping 0.2 percentage points). If it is a bullish surprise, that exceptionally close resistance will break.

British Pound: Fitch Warns UK May Lose AAA Status
There were two fundamental fronts for sterling traders to keep an eye on this past session. From the docket, December’s consumer-level inflation (CPI) data offered little to change the British pound’s fate. The headline, annual reading held at a 2.7 percent clip for the third consecutive month. This is keeps the policy yardstick above the 2.0 percent threshold and the pressure for the Bank of England to respond with ineffective rate cuts (though they would be very effective in hurting the currency) diminished.

Unexpected was Fitch’s warning that the UK was moving closer to losing its AAA-status. Though the sterling long ago lost its top reserve status, it is still a financial benchmark. The loss of the top credit rating could be just as painful – perhaps moreso – as it would be for the United States.