By DailyFX – The recent surge in volatility has left US assets in the dust, with the dollar, bond yields, and stocks all considerably lower…. …

Seemingly overdrawn price movements have
nonetheless occurred on little fundamental data leading to a great deal of
speculation ahead of tomorrows economic news. With traders around the world now
firmly at their trading desks, the boost in liquidity limited any continuation of
last weeks move and sets the stage for reactions to follow the upcoming deluge of
fundamental reports. Dollar bears who latched on to last weeks precipitous
declines must subsequently hope for mediocre economic data to set the stage for a
fundamental shift in Greenback markets. On the opposite side of the fence, dollar
bulls looking for retracements expect that reasonably strong news will restore
equilibrium to markets and force the EURUSD to re-test its previous 7-month range
high. Given the uncertainty surrounding major currencies, US fundamentals will prove
critical to predicting future trends for the almighty Greenback.

Special attention turns to the first economic release on the ledger, with US Durable
Goods Orders to show that demand weakened through the month of October. With
volatile changes in headline Durable Goods Orders on a monthly basis, the potential
for large surprises highlights the risks surrounding the release. Traders may
nonetheless wait for the later Consumer Confidence and Existing Home Sales numbers
to force the dollar in either direction. Consumer optimism will likely garner a
great deal of attention, as domestic retailers hope that strong confidence will keep
important December holiday sales high. Suffice to say, however, the recent focus on
housing data likewise places pressure on the US Existing Home Sales Report.
Surprises in either measure would likely provide markets with ample reason to send
the Greenback in either direction, with current biases seemingly calling for a
pullback in dollar declines.

Bonds – US 10-year Treasury Note Futures

Price charts below emphasize the truly bearish turn in outlook for the future of US
expansion and subsequent interest rate changes. Risks arguably remain to the
downside for bond premiums, with positive economic data likely to provide a retrace
higher in yields. Otherwise, we could see yields on the 10-year bond future break
below the highly significant 4.9 percent mark triggering a further breakdown for
the US dollar against its major counterparts.

FX – EUR/USD

In the three previous active sessions, FX traders were able to push the EURUSD over
300 points higher. This substantial was achievable only because of the lack of
liquidity in the final days of last week when US and Japanese traders left their
desks for the extended holiday weekend. Looking at todays price action though
reveals a very different market. First and foremost, liquidity returned to full
capacity as US markets came back online. The gap that formed in virtually all the
dollar-denominated pairs at the open of the Asian session revealed the faction of
traders who tried to get in on the last gasp of the rally before the bloated market
settled all the pairs. Almost unprecedented, todays EURUSD gap higher tallied 50
points. However, the bullish sentiment did not last long as only an hourly later
the pair was stopped cold at 1.3180. From this level, the highly leveraged
volatility of last week switched gears to a more conservative market looking ahead
to weighty economic releases in the coming days. The fundamental value of the
dollar will be bombarded Tuesday with indicators evaluating consumer confidence,
durable goods orders and perhaps most importantly existing home sales. With the
EURUSD already boasting a strong technical break of former highs, a bearish cut on
tomorrows data could provide the fundamental impetus to extend the rally into a
genuine trend. On the other hand, shaking off the shackles of the recent
environment of sluggish volatility could prove more difficult than many expect.

Equities – S&P 500 Index Futures

Black Friday was so named because firms jokingly said that the jump in consumer
spending following the Thanksgiving holiday will finally push firms into the black.
However, this was not the feeling on Wall Street Monday. All three major equities
indices were on the lam with the Dow off 1.3 percent, the S&P 500 sinking 1.4
percent and the NASDAQ Composite pacing the drop with a massive 2.2 percent plunge.
The turn seemed unusual as initial reports indicated consumers spent 19 percent more
over the extended shopping weekend than they did just a year ago. Conversely, it
seemed to be a combination of overextended price action, rising oil prices and
caution ahead of coming economic indicators that tipped equities into a dive. The
steady decline in energy prices from record highs set in mid-July has consistently
contributed to the positive move in stocks. Holding true to this correlation in
good and bad times though has proven detrimental to firms as the recent contract
rollover has triggered a rebound in volatile crude oil prices. Another 1.8 percent
advance today has finally pushed the raw material above the closely watched $60 per
barrel mark. Furthermore, the steady run up has found fewer buyers in the wings to
swoop in and add momentum to the petering run. This pressing market condition has
become all the more important as a stocked economic calendar looms over all US
markets. In less than 24 hours, consumer confidence, durable goods orders and
existing home sales reports will set macro-economic valuations in motion. While
stock traders have grasped firmly to the hope of an eventual rate cut by the first
half of 2007, the consistent pain felt in the housing sector, and more broadly in
the overall economy, may begin to take precedence.
Regards,

John Kicklighter
Forex Capital Markets
32 Old Slip, 10th Fl
New York, NY 10005
Email: jkicklighter@dailyfx.com

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