Friday's Market Is As Cold As The Weather

Includes: FXA, FXB, FXC, FXE, UDN, UUP
by: Dean Popplewell

Capital markets are trying to find their trading legs with participants yet to return to normal working conditions after the holiday shortened season. The northeast winter storm along the US and Canadian seaboard is not helping matters, guaranteeing even thinner trading conditions and liquidity remaining a premium. Next week, normal trading conditions should prevail with Friday's NFP being the main event of the week. Will the US manage to keep their job momentum intact?

Several FED speakers are slated to speak at a conference in Philadelphia later today. Currently, the market expects what they say again to support riskier assets like equities. Few do not expect the FED to sway too far away from their recent rhetoric, reiteration of dovish tapering stance, buying of risk, allowing of bond yields to back up and the mighty dollar to advance against JPY (the patience trade of 2013), commodity currencies, and probably the EUR in the short term.

For now, the consensus risk scenario is "heavily weighted to the FED tightening earlier than advertised by forward guidance because economic slack is considerably less than indicated by Fed speakers." Helicopter Ben and company (especially the doves) will be expected to push back on this train of thought today and in the immediate future. Policy members are required to portray a consensus force indicating that the FED are nowhere near to tightening policy rates – this would put a temporary stop to any further rise in bearish sentiment.

The dollar is ending the week consolidating most of Thursday's gains against the EUR's (1.3610-50) and GBP (1.6400 -50) while maintaining its weaker trend against the CAD (1.0610-40), AUD (0.8965-90) and NZD (0.8270-99).

Next week will be a different story; all hands will be on deck, a new playing field, but will the same game rules apply in 2014 as clearly as last year? Markets were handcuffed by central banks and have been for 18-months. With Helicopter Ben about to fly the coop will the old themes continue to dominate this year or are policy makers getting ahead of them themselves even with a token? Time will tell.

Happy New Year!