[ForexNews]

Short USD has been a painful position over the past month, just as was the case for most of Q4 last year. The question is how much of the EUR/USD move is position liquidation and how much is based on a shift in fundamental perceptions. The two factors that point to fundamentals are the restored correlation with rate differentials and the widening of credit spreads among weaker euro zone credits. We would also note that Dec 2010 fed fund futures are now at 1.055, 35bp higher than at the end of November when the USD was at the lows. That equities and commodity prices are near highs is not necessarily inconsistent since the data reflect a much more upbeat view of economic prospects.

This does not mean that the EUR is done for, but it does suggest that renewed EUR strength has to be backed either by better news on the EUR side or worse news on the USD side but that panic and position unwinding seem to be far from complete as explanations.

Consensus trades hard to pin down

This is a genuine question as the market consensus seems harder to divine now than over most of the past year. In G10 we would imagine that the market is still positioned somewhat long EUR but is increasingly uncomfortable with the position and expects a USD bounce next year. The long CAD, short AUD position now seems consensus. Short JPY also appears to have become consensus intellectually, even if it is unclear whether positions are large.

The Fed officially proposes a term deposit facility

In a statement on Monday, the Federal Reserve Board officially announced a proposal to introduce a term deposit facility. The statement read "term deposits would be one of several tools that the Federal Reserve could employ to drain reserves". However, the statement made clear that this was a "component of a process of prudent planning" and has "no implications for monetary policy decisions in the near term". Following the testing of reverse repo operations in recent weeks, this can be seen as another step toward readying the Fed's toolkit for when the time comes to tighten policy.