Dollar may have Lost its Euro Driver, A Recovery now Rests with Risk Trends

• Dollar may have Lost its Euro Driver, A Recovery now Rests with Risk Trends
• Euro Can Further Recovery Lost Ground Despite Dim Financial Future
• Canadian Dollar Tumbles after Employment Data, Looking Ahead to BoC Decision
• British Pound will Struggle to Engender a Clear Trend on a Mum Bank of England
• Australian Dollar Puts its Round of Event Risk up to the RBA Litmus Test
• New Zealand Dollar will Depend on Risk Trends in the Absence of an RBNZ Hike

Dollar may have Lost its Euro Driver, A Recovery now Rests with Risk Trends
The dollar is doing more than taking a mere break. The benchmark currency may have been knocked off its bullish path. With the euro finding a tangible level of stability and risk appetite trends failing to play to the dollar's role as a 'safe haven' currency, the fundamental drive is sputtering. This does not mean that a full-on selling effort is inevitable; but it does significantly reduce the probability that the greenback will quickly revive the recovery effort that it launched at the beginning of November. Assessing the dollar's performance, Friday's close produced the third consecutive decline and subsequently marked the first weekly loss in four.

More specifically, the tumble through the final 24 hour period was the sharpest since October 20th. And, this wasn't the most the most discouraging development for the currency. Far more troublesome is the reality that the dollar plunged against high risk (fundamental and yield-based labels) and fellow safe havens alike. The fact that EURUSD plunged 1.6 percent and AUDUSD rallied an equivalent distance is not as remarkable as the more balanced USDJPY suffering its biggest dive (2.2 percent) since May 20th while USDCHF endured its worst decline (1.9 percent) going back to May 8th of last year.

When selling pressure was levied on the dollar Wednesday and Thursday, both USDJPY and USDCHF would buck the trend and hold up remarkably well. What changed to migration away from the benchmark? Momentum was a key component in this equation. As the flow through EURUSD and other benchmark pairs increased, the spillover would naturally impact the more 'resilient' pairs. That said, the true turning point here was simply capitulation amongst currency traders. Fundamentally, the dollar is a naturally weak currency due to the global progress towards diversifying away from the uniform reserve currency and given the Federal Reserve's consistent effort to increase the money supply through the Treasury purchases.

Consequently, the dollar needs an active catalyst to keep it buoyant. And, since Wednesday, we have seen the dollar's most potent support – euro selling – reverse course. Like the dollar's rebound a month ago, the euro has marked its turning point around its central bank decision. The ECB did little to expand its official support of the region's financial system; but there has been considerable talk that the central bank is buying up government debt to narrow yield spreads that symbolized the region's financial troubles.

Moving forward, the greatest potential for fundamental influence still lies with risk appetite trends. Interestingly enough, the S&P 500 put in for its smallest advance in the three-day rally and subsequently fell short of marking a new two-year high. However, given the proximity to this psychological level, it would be particularly easy for the benchmark equity index to overtake the technical milestone and carry investor sentiment along with the way. This could have transpired to end this past week had the US employment statistics not dampened confidence. In a bigger-picture sense, the monthly nonfarm payrolls will do little to alter the health of the underlying economy. In fact, at this pace, it would take approximately 200,000 to 250,000 net additions each month for the next six years for employment to return to pre-crisis levels. Nonetheless, the NFPs report is an assumed catalyst for volatility; and so, the market fulfills expectations with a reaction. Thus, a 39,000 net increase that represents the biggest shortfall from expectations will curb an already hesitant sense of confidence.

Euro Can Further Recovery Lost Ground Despite Dim Financial Future
Though the euro would finish Friday lower against the Australian dollar and Swiss franc – this does not detract from the currency's remarkable strength. In fact, both the Aussie and Swiss currencies surged against all of their own counterparts through the session. Looking to other crosses, EURUSD would put in for its most aggressive rally in six weeks, and EURGBP climbed for a third consecutive session. If we were scanning the economic docket for the motivation to this move; we would come up short. Final service sector PMI figures and region retail sales is not influential. What was significant was rumors that the ECB was buying Irish, Greek and Portuguese government debt in an effort to lower yields during an otherwise think liquidity month. Furthermore, Spain passed new austerity measures and Germany raised its growth forecasts.

Canadian Dollar Tumbles after Employment Data, Looking Ahead to BoC Decision
The Canadian dollar was the worst performer Friday thanks in large part to the November employment figures. The 15,200 net addition to the nation's payrolls was a modest miss; but the Canadian dollar really moved after the US data hit the wires. The economic connection between these two nations should not be ignored. Next week, we will see if all the BoC dovish musings carry any weight with Tuesday's rate decision.

British Pound will Struggle to Engender a Clear Trend on a Mum Bank of England
Continuing the theme of a light economic docket the pound would only have the November PMI service sector activity reading to respond to. And, a barely off the mark reading gave traders little to work with. Next week's docket is the exact opposite of what we have seen this past week. Amid all the data, the top potential catalyst is the BoE rate decision. With even the ECB stepping up support, will the MPC fall in line?

Australian Dollar Puts its Round of Event Risk up to the RBA Litmus Test
Aside from the franc, the Aussie dollar was the best performer through the week's close. With the sharp recovery in risk appetite, the market's favorite high-yield currency is clearly exploiting its best values. However, we have seen domestic readings of health deteriorate in recent weeks. If risk appetite trends themselves don't maintain their rapid ascent, the Aussie dollar may succumb to the tepid outlook for further hikes.

New Zealand Dollar will Depend on Risk Trends in the Absence of an RBNZ Hike
Rounding out a week of central bank rate decisions next week, the RBNZ is scheduled to announce its policy decision Wednesday evening. Unlike many of his counterparts though, Governor Alan Bollard has been very vocal about his expectations for policy. In recent months we have seen a few banks fall into trouble and domestic demand shrivel. The key to this meeting is discerning how far into the future the next hike will be.