Dollar Mildly Softer As DOW Hit Record, Aussie Lifted By GDP

The dollar weakened against commodity currencies, softened a bit against European majors as DOW jumped to close at record high at 14253. Investor sentiment was solid on expectations that the Fed will continue its easing efforts after recent speeches by chairman Bernanke and vc Yellen. But the overall impact of risk sentiments on the currency markets was again rather muted. The euro is stuck in tight range above 1.3 against dollar for the momen,t and even the sterling was limited well below a near term resistance at 1.5221 against dollar. The USD/CAD is holding well above 1.0216 minor support and there is no sign of steeper selloff yet. Yen crosses are also clearly stuck in range.

Recently, both Bernanke and Yellen had sounded dovish and defended the Fed's open-ended asset purchase program. Last week, Chicago Fed Evans warned of the danger of removing accommodation prematurely. Yesterday, Richmond Fed Lacker warned that small mistakes in timing the Fed's exit could have "large consequences". After all, Bernanke has emphasized he has backing from majority of Fed policy makers on continuing the stimulus.

The Australian and New Zealand dollars are the strongest performers so far this week. The Aussie was supported by solid economic data: Australian GDP grew 0.6% in Q4, in line with expectation. Overall growth in 2012 was at 3.6%, strongest pace in five years. Treasurer Swan hailed "Australia's around-trend growth rate over the year is more than four times the OECD average." And he said that the country has managed to "achieve solid growth in the December quarter at a time when around half of all advanced economies contracted, including five major advanced economies." However, some economists pointed out that the details of the GDP report were weak as domestic demand remains below trend and the growth was too heavily dependent on exports.

At his last Government Work Report, Chinese Premier Wen Jiabao unveiled that the government retained its GDP growth target of 7.5% but reduced the CPI target to 3.5% from 4% last year. This was compared with PBoC Deputy Governor Yi Gang's CPI forecast of 3% in 2013. The report showed optimism over the country's economic outlook. While the economic recovery after the global financial crisis remained "full of uncertainty and not yet on a stable footing", the "considerably increased capacity" in the manufacturing sector's significantly improved infrastructure, high savings rates and large workforce act as "favorable conditions and positive factors" to sustain economic developments.

Looking ahead, the BoC will be the main focus today as markets are expecteing the central bank to leave rates unchanged at 1.00%. The BoC has noted that the need for rate like is "less imminent" in its latest statements. But based on recent economic data and outlook, the central bank might even drop the tightening bias altogether. If that happens, we could seen another USD/CAD rally. Other data to follow: the Eurozone GDP revision, US ADP employment, factory orders, the Fed's Beige Book and the Canadian Ivey PMI.