Dollar Ends Friday with a Whimper but There is Risk and Euro-Based Volatility Potential Next Week

Dollar Ends Friday with a Whimper but There is Risk and Euro-Based Volatility Potential Next Week Euro May not Remain Stable for Long with Ireland Set to Vote on Bailout, EU Divisions Growing British Pound Edges Higher as an Important Round of Event Risk Approaches Next Week Canadian Dollar: Finance Minister Flaherty Says the Biggest Risk to Canada isn't the Currency Australian Dollar: Is the Aussie's Buoyancy Fully Dependent on Positive Risk Flows? Japanese Yen Traders Hold Their Breath for a Volatile Open should China Hike Rates Dollar Ends Friday with a Whimper but There is Risk and Euro-Based Volatility Potential Next Week As if to drive home the point that the combination of December seasonality and the weekend liquidity drain would present a wave of exhaustion for the speculative markets; the Dollar Index ended Friday virtually unchanged. That said, there are a few very prominent, fundamental threats scheduled over the coming week that could breathe life back into the FX and other capital markets. As it stands, there isn't a natural bias for speculators to pick up on next week. That is problematic as it means the there will be some level of hesitance to adopt a trend development regardless of the direction it takes. To give us a sense of the mixed view, we first refer to the traditional standard-bearer for investor sentiment – the S&P 500. The benchmark equity index closed out its third consecutive advance to a two-year high on Friday. And, though there is natural bullish bias here, there is also a distinct lack of momentum (conviction) in this push higher and a warping influence in government participation. In the same vein, the currency market has settled into congestion that is set back from potential breakout levels. Perhaps the best example is EURUSD, which is trading well within past two weeks' range of 1.3420 to 1.2970. The positioning of the FX market and the natural predisposition for capital markets to settle into the final month of the year distinctly contrasts however with the ongoing anxiety surrounding a few unresolved fundamental hazards. Perhaps the most immediate worry heading into the new week is the delayed reaction to the surge in Chinese inflation released early Saturday morning. Why does a country-specific release have so much influence over global sentiment? China is considered the benchmark for growth and return; and in this role, bulls find comfort in their leveraged bets of returns that perhaps don't fit the economic potential in other economies. As for the consumer inflation report specifically, this reading acts as the temperature gauge for nation. The 5.1 percent annualized clip of expansion is well above acceptable levels – and likely the reason for the government's decision to raise the reserve requirement ratio earlier on Friday for the third time in five weeks. This move is expected to sideline another $53 billion in capital via Chinese banks. Yet, the reaction to the reserve ratio hike was mute. The market's real fear is a hike to the nation's interest rate. Will we see such a move? Time will tell. Later in the week, speculators' (and dollar speculators specifically) focus will turn back to Europe. Amid pressure for financially struggling EU members to balance their books and refusals of additional support, Ireland's parliament is scheduled to vote on the EU and IMF bailout Wednesday. The financial shepherds have already pledged 85 billion to help the country; but what happens if the nation decides to reject the aid? We'll discuss that below. Thanks to Friday's US economic releases, we were also reminded of the dollar's own fundamental pains. The November budget hit a record deficit for the month of $150.4 billion. Moody's confidence that the nation won't be at risk for a downgrade for at least 18 months looks a little more optimistic than it should with this release. That leads us to next week's top offering: the FOMC rate decision. Given the adoption of the latest $600 billion stimulus plug was this past November, a meaningful change is unlikely. That said, if investors are particularly sensitive to fiscal and monetary prudence (which the five-month low from the 10-year Treasury would suggest), the event will be scrutinized nonetheless. Euro May not Remain Stable for Long with Ireland Set to Vote on Bailout, EU Divisions Growing Though the euro may have seemed balance against the dollar and Japanese yen (a side effect of underlying risk trends), the currency was stumbling versus its UK and Swiss counterparts Friday. While ECB's Nowotny suggested an unwinding of liquidity measures was necessary and Sarkozy echoed Merkel's admonition that no bailout expansion nor Euro Zone bond would be passed; we saw the IMF hold off on passing its 22.5 billion euro loan to Ireland until after the nation's parliament put the support to a vote. This is a remarkable contrast; and something will have to give – either barriers to support, members' growth or the group's stringent rules. The most likely outcome next Wednesday is a vote for the support. That said, voting it down presents extreme risk. This scenario could send the euro plummeting and therefore should be considered. British Pound Edges Higher as an Important Round of Event Risk Approaches Next Week The sterling has been coasting under the fundamental radar these past weeks. Considering it will take time for the government's aggressive austerity measures to have its impact on growth, FX traders are happy to take advantage of the interim lull. Looking ahead to next week, we have important CPI, jobs and housing data; but the pound is more likely to feel the blowback from euro capital flows. Canadian Dollar: Finance Minister Flaherty Says the Biggest Risk to Canada isn't the Currency It is an economic fact of life that an expensive currency curbs exports. However, according to Canadian Finance Minister Flaherty; this isn't the greatest threat to Canada. The policymaker said US growth was the most prominent danger to the world's eighth largest economy. Technically, this is true; but in reality both will present a problem for Canada. And, ultimately, they will both weigh the currency lower over the medium term. Australian Dollar: Is the Aussie's Buoyancy Fully Dependent on Positive Risk Flows? In the past months, the Australian dollar has redoubled its positive correlation to risk appetite given its growth and yield bearings. However, does this relationship necessarily mean the currency will unquestioningly follow risk appetite trends? If so, the reaction to China's inflation data and perhaps an interest rate hike present a clear threat. The same could be said about European financials as its problems continue to mature. Japanese Yen Traders Hold Their Breath for a Volatile Open should China Hike Rates This past week, we saw business confidence drop, consumer sentiment decline and GDP-based inflation slip even further into deflation. And, despite this all, yen traders keep their focus on outside forces. Where investor sentiment goes, the yen takes the opposite rate. This isn't because the currency is a safe haven (it has its own troubles). Instead, its difficulties ensure the currency will retain its funding currency status.  http://www.dailyfx.com/real_time_news/