Risk Trades Dip, so does US Dollar

One major item remains on the USD calendar for the remainder of the year, the FOMC decision, and Lockhart added some extra intrigue with a comment Monday. The yen was the top performer to start the week while NZD lagged in a classic 'risk off' trade. The Asia-Pacific calendar is light. Existing Premium Inights include USDCHF, USDCAD and AUDCAD. The Aussie jobs report and SNB rate announcement will prove instrumental for these pairs.

The FOMC decision is on Dec 16 and given the improvement in economic data – especially jobs – most economists think the Fed will remove the pledge to keep rates low for a 'considerable time'. Not so, said Atlanta Fed President Lockhart.

Not only is Lockhart a voter in 2015, he also tends to reflect the core of the FOMC. He said the Fed isn't in a rush to drop the commitment and urged patience on liftoff, saying it could come in H2 2015 or later.

The bond market is sending the same signal with 5-year breakevens falling another 5 basis points on Monday to 1.31% -- implying inflation well-below the Fed's target.

On the other side was the Fed's Williams who repeated that mid-2015 is a reasonable guess for the first rate hike.

In the market, after rallying in early-week trade to a cycle high of 121.84, USD/JPY fell to as low as 120.22. We warned yesterday that USD/JPY was severely overbought on a variety of timeframes and the soft Japanese GDP and Chinese trade numbers were the queue for a correction. The 162 pip decline in the pair was the second-largest low-to-high correction in USD/JPY since the BOJ decision on Oct 31. Several retracements into that zone have proven to be buying opportunities in the past.

The overall theme was risk aversion with the S&P 500 falling 15 points in the largest decline since Oct 22. So far the retracement is nothing out of the ordinary and there are no signs that the rip in the US dollar is done but some caution is warranted.

In Asia-Pacific trading, the calendar features Japan November preliminary machine tool orders. The report is due at 0600 GMT; there is no consensus but the prior reading showed a massive 30.8% y/y jump.