Risk Off as Week Starts, Euro Pressured ahead of Merkozy Meeting

Dollar opened the week higher as markets are back in a risk off mode. A couple of news are weighing on market sentiments in Asia. IMF's chief economist Olivier Blanchard said that the fund will make a "fairly substantial" cut to global growth forecast this year even though it has already lowered 2012 growth projection to 4% back in September. He expects growth to be "not very far" from 3-4% with Europe "very close to zero". The fund will publish the revised forecast later in January on 24 or 25. Meanwhile a German magazine reported over the weekend that IMF is losing confidence in Greece's ability to fix the public finances problems. The magazine said IMF saw three options for Greece, including enacting further austerity, private creditor write off, or increasing the Eurozone bailout. The magazine questioned whether the target of 120% debt to GDP ratio by 2020 is achievable. German finance minister Wolfgang Schaeuble noted that 50% write-down on Greek debts is insufficient.

German Chancellor Angela Merkel and French President Nicolas Sarkozy are set to meet in Berlin today on details of the fiscal compact agreed in December's EU summit. The will also be discussion on French promoted financial transaction tax, the "Tobin Tax". Such "Tobin Tax" would be applied across EU including UK. But British Prime Minister David Cameron has already expressed his opposition unless the tax is imposed globally. Italian prime minister Mario Monti said that no additional austerity measures are needed to meeting the goal of eliminating deficit in 2013. Italian 10 year yield breached the "unsustainable" 7% level last week and attention would be on whether yield would move farther higher in near term. Bond auction of Spain and Italy on Thursday and Friday will be closely watched, along with ECB meeting.

News from Asia saw India's prime minister Manmohan Singh lowered the growth expectation from 7.5% to 7% in the year ending March. Australian dollar was pressured by disappointing retail sales figure, which was flat mom in November. New Zealand trade deficit widened slightly more than expected to NZD -308m in November. China new loans increased to RMB 640.5B in December up from RMB 562.2B a month ago. The broad M2 money supply soared 13.6% from a year ago, compared with 12.7% in November. The outcome probably reflected the PBoC's move to reduce the reserve ratio for the first time in almost 3 years to encourage lending in December. In coming months, the government's monetary policy is expected to remain loose in order to stimulate growth and to pave the way for soft landing.

Looking ahead, Swiss unemployment, retail sales, Eurozone Sentix investor confidence, German trade balance and industrial production, Canada building permits will be released.

Dollar index edged higher to 81.47 today as recent rally continues. The medium term outlook remains bullish for the moment. As discussed before, medium term decline from 88.70 should be finished at 72.69 on a head and shoulder bottom pattern. Current rally should target 61.8% retracement from 88.70 to 72.69 at 82.58 and above. In any case, we'll stay near term bullish as long as last week's low of 79.51 holds.