November was a great month for the US dollar but December is proving to be a challenging one. We are only 2 trading days into the new month, but President Trump is back to his old ways with the market reacting to all of the elusive comments coming out of the White House. On Monday, he called for lower interest rates and criticized the strong dollar. On Tuesday, an avalanche of headlines hit the wires suggesting that trades talks are going nowhere. While Trump keeps on emphasizing that China wants a deal, everyone from Commerce Secretary Ross to Vice President Pence have implied that the bar is high because Trump won't allow China to take advantage of US with the wrong deal. The President himself openly mused that it may be better to wait until after the November election to make deal. Fox news went on to say their sources indicate that the tariffs will be increased on December 15th. Of course, none of this has been confirmed but today's comments from Trump and White House officials indicates that trade talks are not going well. The Fox headline could be the Trump's Administration's way of preparing the markets for the possibility of new tariffs. So at the end of the day, even as non-farm payrolls come into focus, in the near term, nothing matters more to the direction of currencies than the decision on tariffs. ADP and non-manufacturing ISM are scheduled for release tomorrow - weaker numbers will have a greater impact on the greenback than strong ones as they would reinforce risk aversion.

The Bank of Canada also has a monetary policy meeting that could trigger a breakout in USD/CAD. For the past 2 weeks, USD/CAD has been confined in a tight range and while no changes are expected from the central bank, Governor Poloz's speech will be watched closely. When the BoC met in October, they set a bottom in USD/CAD when they said the "resilience of Canada's economy, will be increasingly tested." They saw the outlook weakening since July with trade conflicts likely to cause business investments and exports to shrink in the second half of the year. However last month, Governor Poloz squashed expectations for easing when he described "monetary policy conditions as just right." Data since Octoberhas been mixed. Retail sales improved slightly, inflationary pressures remained stable but labor market, housing and manufacturing activity weakened. Canada's labor market is strong but it finally peaked and the worry is that this will carry over to the rest of the economy. If Governor Poloz focuses on the risks, USD/CAD could break through 1.3350 easily but if he emphasizes the appropriateness of current policy, USD/CAD should sink below 1.3250.


The Australian dollar traded sharply higher after the Reserve Bank left monetary policy unchanged. Despite recent weakness in Australian data, the monetary policy statement highlighted the improvements in the property market and the central bank's view that the "easing of monetary policy this year is supporting employment and income growth in Australia and a return of inflation to the medium-term target range" which confirms our view that the RBA is in no rush to ease again. The New Zealand dollar also extended its gains despite a decline in dairy prices.

Euro rallied for the fourth day in a row but with EU becoming the subject of trade comments from Trump, investors should also keep a close eye on the currency. Trump believes that the EU and France in particular has treated the US unfairly on trade, but he said today "we will probably work it out on trade." Conflicting like these is the exact reason why the EUR/USD will be particularly sensitive to EU-US trade headlines. Revisions to EZ service sector PMIs are also scheduled for release tomorrow and if there are upward revisions like manufacturing PMI, it could help EUR/USD test 1.11.

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