Dollar Bid

The dollar's downside momentum has faded since the start of the week and short-term momentum traders have to adjust.  There does not seem to be a precipitating factor.  The German IFO was mostly better than expected and while the UK Q4 GDP was off 0.2% rather -0.1% may could have been a factor, but sterling is holding in better.  Key support is seen for sterling near $1.5520.    Initial euro support is seen near $1.2950 now.    The Fed meeting will be of interest of course, but it is unlikely to a major factor for the dollar. 

Asia, integrated in US tech cycle, seemed to have been boosted by Apple news, but he favorable tone did not carry over into Europe.  Ironically, the tech sector is the weakest today in Europe, off more than 3% at pixel time while the overall Stoxx 600 was off about 0.8%.    Ericsson earnings were lower than expected, hitting share prices.  This also appears to have prompted a bout of profit-taking on long Swedish krona positions. 

Japanese stocks may have liked continued pullback in the yen.  The dollar is taking out a long term downtrend against the yen and this may have spurred interest.  This has been sufficient for the dollar to test its 200-day moving average whcih comes in near JPY78.35.  Some observers are playing up the fact that Japan reported a trade deficit in December and its first annual trade deficit in 31 years.  Yet, as we pointed out earlier, Japan reports trade figures every 10-days and those that follow Japanese data were confident it was going to report an annual trade deficit. 

Three observations to share:  First, the key to Japan's current account surplus is no longer the trade deficit but the investment income (clipping coupons, royalites, licensing fees, dividends etc).  Second, the strength of the yen is forcing more production off shore.  The world's 3-largest chip maker, Elpida, based in Japan, announced it was moving production to Taiwan.  Third, the yen's weakness reduces the chances of BOJ intervention.  It had recently stepped up its formal and informal rhetoric about the yen's strength against euro.  That said, Japanese officals ought to consider changing their tactics and intervening when they have the proverbial wind to their back and with a little effort could push the yen through important chart points. 

Australian inflation data was mixed.  The headline for Q4 was flat, but the key measure for the RBA rose 0.55% to 2.6% year-over-year.  While a rate cut in early February is still likely, the market seems to be still too aggressive with the likely trajectory of cuts.  The New Zealand central bank results out first thing in Wellington and no change is expected. 

There are three developments in the European debt crisis to note.  First, a report, immediately deined, suggested the IMF was pressing the ECB to participate in the PSI.  The ECB has also come out to reject such claims.  Second, Portugal is lining up behind Greece, with its CDS making new highs and further sell off in their bond market.  Third,  Merkel demonstrates her poltiical prowess. 

Ahead of the heads of state summit early next week, she says that German is "ready to show solidarity" and that Germany can consider "joint liability" after more integration.   Merkel shows the carrot and the stick and seems to continue to run circles around Sarkozy--which is partly while the Merkozy label is mis-leading.  France is junior partner and that is becoming clearer in this crisis.