Firm US data not helping the dollar

The US November employment report released at the end of last week helped to reinforce expectations that the Fed will begin tapering soon, possibly as early as the FOMC meeting in mid December. Non-farm payrolls rose by 203k while the unemployment rate dropped to 7%. Job gains have averaged around 180k per month over the last 6 months. The jobs data followed on from several other firm US data releases over the week highlighting strengthening signs of recovery.

Equities reacted well, rising as fears over tapering were outweighed by concrete signs of recovery. Meanwhile bond yields rose over the week although they slipped on Friday. Attention will turn to next week’s Fed FOMC meeting while this week’s data flow will be more limited. The main event will be the November US retail sales report where a moderate gain in sales is expected in terms sales outside of autos, providing the final clues to the Fed’s decision next week.

Elsewhere markets are still reeling from the ECB’s less dovish than expected statement last week as reflected in the subsequent strength of the EUR. Data this week in the Eurozone will be encouraging, with Eurozone industrial production set to rebound. This will be echoed in the UK, with hard data reflecting the strength in manufacturing surveys.

In Japan this morning’s data slate was disappointing, with Q3 revised lower and the current account registering a deficit for the second straight month in October although the JPY impact will be limited. Finally, the RNBZ is will hold a policy rate meeting this week although no change is expected from the central bank as recent mortgage restrictions will have reduced the need to tighten policy. Nonetheless, as reflected by the latest NZ housing data loan to value mortgage restrictions have yet to have a significant impact.

The USD failed to benefit from the solid data in the US last week undermined by some slippage in US yields, with the reaction indicative of a market that is becoming increasingly accustomed to the idea of an imminent Fed tapering. The USD index appears to be struggling into year end, with the EUR taking advantage of the USD’s inability to push higher especially given that the ECB did not appear to be in any hurry to add more monetary accommodation last week.

Conversely USD/JPY looks set to continue to edge higher as sentiment for JPY continues to deteriorate; latest IMM positioning data shows that net JPY positions have hit their lowest since July 2007. The next key technical resistance level is around 103.74. Firm trade data in China over the weekend helped to bolster AUD and NZD although the latter is benefitting the most, boosted overnight by strong house price data in November. Consequently AUD/NZD continues top plumb new depths.

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