Dollar Extends Rebound On Hawkish Fedspeaks

The dollar extended its broad based rebound overnight as talked up by comments of Fed officials. The dollar index was clearly lifted after dipping to 80.44 and is back at 80.87 at the time of writing. Strength in the greenback is clearly seen against Aussie and yen, which reversed much of last week's move. USD/CAD extended recent rally and continues its march to 1.1 handle. Meanwhile, the euro and Swiss franc is starting to give way too. Nonetheless, we're a bit skeptical on the sustainability of dollar's rebound in near term. It should be noted that treasury yields were just mildly higher after the sharp fall last week. 10 year yield closed at 2.869% comparing to this week's low of 2.819%. 30 year yield closed at 3.800% comparing to this week's low of 3.763%.

Philadelphia Fed Plosser said yesterday that the weak December job data won't affect the tapering plan. He cautioned "not to read to much into one month's data". And he "would not over-interpret the decline in participation as a lack of progress made in labor market conditions or as a problem that must be corrected." On the other hand, he said "the economy has met the criteria of significant improvement in labor market conditions for ending the program". And, further "increases in the balance sheet are unlikely to provide appreciable benefits for recovery". Plosser painted an optimistic outlook and expects unemployment rate to drop from current 6.7% to 6.2% by year end.

Dallas Fed Fisher noted he was "pleased with the decision to finally begin tapering our bond purchases". But, he would have "preferred to pull back our purchases by double the announced amount". That is, Fisher preferred lowering the USD 85b per month asset purchase by USD 20b, instead of USD 10b announced. He emphasized markets are not in a "bubble" mode for stocks or bonds or most other assets. And adjustments in these markets "need not threaten the real economy". And he would " vote for continued reductions in our asset purchases, with an eye toward eliminating them entirely at the earliest practicable date."

Chicago Fed Evans and Atlanta Fed Lockhart will speak later today. Fed will also release the Beige Book economic report.

After last week's steep retreat, the dollar index drew some support from the flat 55 day EMA and recovered. Upside moment is no too convincing for the moment and we might not be seeing resuming of rebound from 79.00 low yet. But current recovery from 79.68 should at least be part of the sideway pattern from 81.48. Hence, further rise will remain mildly in favor for a test on 81.48. In that case, we'd be cautious on strong resistance there to bring another decline to extend the sideway pattern.

Elsewhere, the World Bank raised the global growth forecast to 3.2% in 2014, comparing to June projection of 3.0%. That's an acceleration from the 2.4% growth in 2013. For 2015, it projected 3.4% global growth, comparing to June forecast of 3.3%. It noted in the report that "strengthening of output among high-income countries marks a significant shift from recent years when developing countries alone pulled the global economy forward." And that “should help compensate for the inevitable tightening of global financial conditions that will arise as monetary policy in high-income economies is normalized."

On the data front, Swiss retail sales and Eurozone trade balance will be released in European session. US will release Empire state manufacturing index and PPI.