Dollar Firm Against Commodity Currencies, ECB And BoE Watched

The dollar extends its rally against Canadian dollar and strengthens against Aussie today. However, while the greenback is firm against European majors and yen, the strength is limited. US equities dropped mildly overnight as consolidations continued and that was followed by mild weakness in Asian stocks. Treasury yields closed higher following the solid ADP job report but closed quite a bit below the intraday high. 10 year yield struggled to reclaim 3% handle. Reactions from FOMC minutes were muted as markets are looking forward to the ECB and BoE announcement today and employment data from US tomorrow.

The minutes for December 17-18 FOMC meeting showed that "majority of participants judged that the marginal efficacy of purchases was likely declining as purchases continue." Meanwhile, they're also “concerned about the marginal cost of additional asset purchases arising from risks to financial stability." Thus, the policy makers decided to starting tapering the USD 85b per month asset purchase by USD 10b starting this month. A few officials urged to have a "more deterministic path" for the schedule of reduction in bond buying. But, the minutes provided no information on the path.

Economic data released from Australia today were better than expectation. Retail sales rose 0.7% mom in November versus consensus of 0.4% mom. Building approvals dropped -1.5% mom in November versus expectation of -3.0% mom. Nonetheless, Aussie was weighed down by speculations that RBA would cut rates again this year from the current record low of 2.50%. Some analysts expected a cut in April, to be followed by another cut in August. And, the AUD/USD could be pushed further lower back to 0.8 level.

In China, CPI moderated more than expected to 2.5% yoy in December versus expectation of 2.7% yoy. PPI was unchanged at -1.4% yoy, versus expectation of rising back to -1.3% yoy. That inflation figure was well below the government's upper limit of 3.5%. And economists noted that subdued inflation would be supportive of a neutral monetary policy stance.

Looking ahead, the BoE and ECB policy announcement would be the major focus today. Both are expected to leave policies unchanged. BoE would likely just release a brief statement and the reactions should be muted. The ECB president Draghi will likely reiterate the forward guidance to keep rates low for an extended period of time. Meanwhile, there is basically no expectation for ECB to launch another round of LTRO.

ON the data front, UK will release trade balance. Eurozone will release confidence indicators and German industrial production. US will release jobless claims. Canada will release housing data.