Dudley Bubbly But Stocks Stumble

Core FOMC member Bill Dudley delivered an optimistic speech on the US economy that helped the US dollar. On the day, the yen led the way while the pound lagged. Up later, the RBA minutes could jolt the Australian dollar. We issued 1 new trade in EURUSD after 1 of 2 longs hit all targets with 180-200 pip profits. See the 2 charts on EURUSD in today's latest Premium Insights.

NY Fed President Dudley has been one of the more cautious core members of the Fed but he tossed that aside Monday in a speech that emphasized good US growth dynamics for 2014 and 2014. He also forecast more substantial improvements in labor market conditions.

Prior to US trading the dollar continued to languish but it found support after the comments. EUR/USD dropped to 1.3500 from as high as 1.3542. Dudley later tempered his comments by saying there is not yet enough growth momentum to five the Fed confidence in the outlook.

Traders are having difficulty reading Fed signals regarding tapering and headline-driven trading has come into favor. With retail sales on tomorrow's US calendar, expect that to continue.

Late in US trading, supposedly on a warning from Carl Ichan, US stocks stumbled and closed down 0.4% to 1791. Earlier in the day, the index hit a record 1800 but six consecutive weeks of gains and an 8% rally since mid-October have left the market vulnerable to a correction. It's a similar story for yen crosses.

The Asia-Pacific calendar is somewhat quiet but there will continue to be a focus on China as optimism builds following the outline of reforms. Keep a close eye on the Shanghai composite.

The top economic data is at 0030 GMT when the RBA releases the minutes of the most recent meeting. Look for anti-AUD jawboning and lamenting the slow transition from investment in resources to other sectors. There is a risk the market is underpricing how soon RBA rate hikes will come, especially if China continues to rally.