Dollar Finishing Year Mixed, Second Annual Gain Against Euro

The US dollar is narrowly mixed as activity winds down. The main price action to note is that the euro fell through the JPY100 level for the first time since mid-2001. For the most part, the dollar is confined to yesterday's ranges against the major currencies.

Emerging market currencies are finishing the year in mixed fashion as well. Intervention by Turkey is helping the lira recover from record lows. The South African rand, which has been the strongest emerging market currency over the past couple of weeks is shining today, gaining almost 1% against the greenback. On the other hand, intervention by Poland yesterday and possibly today appears to have been shrugged off and the zloty is the weakest of the emerging markets currencies today. More generally, the eastern and central European currencies are the weakest today.

Asian equities finished the year on a firm tone, with the MSCI Asia-Pacific Index gaining 0.4%. However, the index is lower on the year, for the first annual decline in three years. Utilities were the weakest sector in the area, losing 26%. The Dow Jones Stoxx 600 is also slightly higher near midday in London, but will also post the first annual loss in three years.

Bond markets are mixed. Of note Italy's generic 10-year bond is set to finish the year just above 7%. UK and Dutch 2-year yields slipped to record lows, while German 1-year continues to offer a negative yield (as do German bills). The Dutch 1-year also offers a negative yield. Meanwhile, overnight lending by the ECB rose yesterday to 11.3 bln euros from 4.3 bln and overnight deposits stood at 445.7 bln euros, just below the 452 bln on Dec 27.

The day's highlights include:

1.  HSBC Chinese PMI 48.7 in Dec, down slightly from flash reading of 49, though up from the 47.7 Nov reading. Of note input prices fell sharply, though as we noted here yesterday, grain prices have rallied strongly in recent weeks and this may translate not only into higher food prices, but also livestock prices, which as we know is an important driver for inflation, especially in developing economies.

2. Hungary approved controversial law that further erodes the central bank's independence (HUF is worst performing EM currency in past two weeks, losing almost 4%).

3. South Korea's Dec CPI came in at 4.2% rather than the consensus of 4.0%, reflecting a 0.4% rise on the month. It may imply that Korea is slower to ease monetary policy in 2012 than others in the region.

4. The PBOC fixed the yuan at a new low of 6.3009 against the dollar.

Last event of the year is Spanish PM Rajoy press conference following cabinet meeting that is expected to agree on a 4 bln savings program for Q1. Note that since the election (Nov 20) , Spanish bonds are among the best performers, returning around 8%. Savings may come from freezing public works projects, extending the pay freeze on civil servants and possibly getting rid of subsidy for youth rents.