USD - Sentiment appears to be building over the domestic stories rather than a broader USD move driven by talk of tapering. The data highlight this well with notably mixed positioning against the USD, as CAD, AUD and JPY are held net short; while EUR, GBP, MXN and NZD are held net long. The most obvious theme is a preference for the European currencies over the growth currencies. Following week there can be a retreat as amongst amid speculation that Fed could begin cutting back, or tapering its $85 million – per – month bond- buying program when it wraps up its final policy meeting of the year on Dec 18.
CAD - Building bearish CAD sentiment is reflected in the -$5.4bn net short position, which has surpassed AUD’s for the first time since the spring. This is the largest short CAD position since April 2013 when USDCAD was closer to parity. The only release was a softer-than-expected US PPI during the New York trade, the USD/CAD has moved sideways most of the day, unable to set a fresh direction as investors refrain from taking big positions heading into the weekend and ahead of Fed's meeting next week.
EUR - On the last day of trading EUR/USD was down 0.19% at 1.3728, up from a session low of 1.3710 and off from a high of 1.3769.
Sentiment toward EUR has improved for the second consecutive week and the net long position now stands at $2.7Bn – modest relative to its October high but still the largest among its peers. Details are suggestive of increasing risk appetite, as both gross long and gross short position are rising.
JPY - The dollar shot up against the yen on Thursday after U.S. retail sales figures beat expectations and sent investors taking up positions on the possibility that the Federal Reserve could announce plans to scale back its USD85 billion monthly asset-purchasing program as early as next week.
Bearish sentiment towards JPY is strong, and it remains the largest held net short vs the USD. However the pairing back of both long and short positions suggests some degree of reluctance on the part of market participants. The bearish position remains close to last week’s $16.3Bn short position - the wildest in six years – despite a modest $0.5Bn narrowing W/W.
Gold: Gold futures rose on Friday, but remained within close range of one-week lows as growing expectations for the Federal Reserve to soon begin tapering its stimulus program.
The February delivery traded at USD1, 231.7 a troy ounce during European afternoon trade, up 0.55%. The sentiment amongst the traders where that upbeat data together with the tentative budget deal, could compel the Fed to trim its asset buys as early as next week. For the week as a whole, gold futures gained 0.46%.
Oil - Oil futures weakened Friday on expectations that the Federal Reserve could decide to wind down its stimulus program at a policy meeting next week.
U.S. oil prices are down 1.1% for the week and have fallen in eight of the past 10 weeks.
Light, sweet crude for January delivery settled down 90 cents, or 0.9%, at $96.60 a barrel on the New York Mercantile Exchange.
Summary of the week
In the US, a budget deal and strong data pave the way for imminent Fed tapering. Markets are prepared for Fed tapering and we expect only modest upward pressure on US bond yields. The ECB is under more pressure from disappointing industrial production, strong euro and declining inflation. We now expect the ECB to introduce a negative deposit rate next year.