Dollar to Fall as Yen Gains on Soft Retail Data, Euro Eyes OMT Ruling

Talking Points:

• Euro Looks to ECJ OMT Ruling to Set Stage for On-Coming ECB QE Effort
• US Dollar May Fall as Yen Gains if Retail Sales Data Proves Disappointing
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The Australian Dollar underperformed in overnight trade, falling as much as 1.2 percent against its leading counterparts. The move tracked sharp drop in copper prices, pointing to the implications of a darkening outlook for Australia’s pivotal mining sector and their ultimate impact on RBA policy as the drivers behind the selloff.

The Yen proved strongest on the session, adding as much as 0.5 percent against the majors. The move played out against a background of weakness on Japan’s stock exchanges. The benchmark Nikkei 225 index fell over 1 percent, with the risk-averse mood fueling an unwinding of carry trades funded in terms of the perennially low-yielding currency.

The spotlight is on the EU Court of Justice in European hours as it delivers advice on the legality of the ECB’s OMT program. The scheme was a bond-buying effort established at the heart of the Eurozone debt crisis in 2012 to buy bonds of troubled member states. While no bonds were actually purchased and today’s announcement is non-binding, traders will be paying nonetheless amid speculation the ECB is on the verge of embarking on “sovereign QE” to fight deflation. The Euro may face selling pressure if the Court gives OMT its stamp approval, and vice versa.

Later in the day, December’s US Retail Sales report. Consensus forecasts point to a 0.1 percent decline in receipts, marking the first decline in three months. US economic news-flow has deteriorated relative to expectations over recent weeks, hinting analysts may be overestimating the economy’s vigor and opening the door for a downside surprise.

A soft result may reinforce worries about the outlook for US consumption – the largest contributor to overall GDP growth – triggered by an unexpected drop in wages revealed in last week’s Employment report. That outcome fueled speculation the Federal Reserve may delay interest rate hikes, punishing the US Dollar, and set off broad-based risk aversion. Evidence of a slump in retail activity may yield a similar result, weighing on the greenback and offering the Yen added support.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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