Japan, Canada and Australia Bear Brunt of US Dollar Strength

The US dollar is broadly higher.  While the euro and sterling are confined to recent ranges, the yen and dollar-bloc currencies are breaking down.  The Canadian dollar is slipping to new multi-year lows ahead of tomorrow's central bank meeting.   The Australian dollar is poised to set new multi-year lows itself ahead of tomorrow's CPI report. Slightly higher than expected New Zealand inflation did spur an initial advance in the Kiwi, but it ran out of steam in front of last Friday's highs and has reversed lower today.  

A Wall Street Journal article by Fed watcher Hilsenrath playing up the likelihood that the Fed extends its tapering program next week has been cited as given the greenback a lift today.  This is especially against the yen, even though a consensus on this seemed to emerge last week as the new data and official comments encouraged looking past the disappointing December jobs report.   

The Nikkei rallied 1%, recouping most of the losses seen since the start of the year, encouraged by the yen's weakness.  Yesterday, the dollar had slipped to JPY103.85 and today bounced back to JPY104.75.  In a rare occurrence, the Chinese equities were among the strongest in the region.  Although the Shanghai Composite was up 0.85%, the small cap Shenzhen Composite was up a little more than 1.5% and the index of Chinese shares that trade in Hong Kong was up 1.8%.   The PBOC reportedly injected CNY255 bln into the banking system via 7 and 21 day reverse repos, the first such injection since December 23.  

Sterling was the only G10 currency that is posting even minor gains against the US dollar today, but the disappointing CBI Trends survey saw the gains pared.  Total orders slumped to -2 from 12.  The Bloomberg consensus called for a 10 reading.  Business optimism slipped to 21 from 24, while the consensus had looked for a 25 reading.   There is a still the feel good factor from last week's exceedingly strong retail sales report.  In addition, media reports suggest that the IMF will announce an upward revision to its growth forecasts for the UK, which would be the second in six months (from 1.9% to 2.4%). 

The MPC minutes from earlier this month due tomorrow along with the December employment report are drawing attention.  There is some speculation that the BOE will lower its unemployment threshold from the current 7.0% level to strengthen its forward guidance that it does not intend on lifting rates.  Sterling is bumping against resistance seen in the $1.6460 area, but a close of the North American session above $1.6440 would keep our sights set on a re-challenge of the multi-year high set on January 2 just above $1.66.  

The euro remains largely confined to the lower end of the ranges seen before the weekend.  Recall last Friday, the euro finished below its 100-day moving average, which is found now near $1.3572.  It had not closed below that average since September, which itself was the first time since July.  Since broken, the euro has been unable to resurface above it.  On the downside, we note that the $1.3525 area corresponds to retracement objective of the advance from early November's test on $1.33 to the late-December high near $1.39.  The euro has not finished the North American session below there ($1.3525), though on an intra-day basis has come closer to $1.35.  

We note that the US-German 2-year interest rate differential is above 20 bp and is at the upper end of its six month range, even though EONIA remain elevated.  The only euro area economic report to note today seemed to confirm the recovery in the German economy, with the ZEW survey showing the current assessment was stronger than expected (41.2 vs 35.0 consensus and 32.4 in December), while the expectations component remained elevated at 61.7 (vs 62 in December and a Bloomberg consensus for 64). It is the first decline in the expectations measure in six months.  

It is a very light calendar for North America today, with no US economic reports or Fed speeches.  Canada reports wholesale trade and manufacturing sales for November, which are not typically market movers, especially ahead of the Bank of Canada meeting on Wednesday.   Given substantial short Canadian dollar positions, which in the futures stand at a record, we suspect it will be difficult to maintain the momentum that has seen the US dollar rally from CAD1.0930 yesterday to CAD1.1020 today.  Technically, we are concerned about a sell the rumor, buy the fact, type of activity after the BoC statement.