Risk Rally Takes a Breath, Dollar Recovers Mildly

Dollar recovers mildly today as risk rally takes a breath in Asia. Overall sentiment continues to favor more upside in stocks, commodities and commodity currencies. European majors will ride on risk rallies and there is room for extending the rebound against dollar. However, investors would likely remain cautious as concerns on the European debt crisis, now with attention on Italy, persist. Hence even in case of further risk rally, we'd expect Euro and Sterling to underperform Aussie and Loonie. And, that would possibly help dollar index stay above 78 level even though stocks are set to take on last year's high in near term.

The FOMC minutes for the December meeting released over night suggested the Fed will focus on communication strategy at meetings this year. Members agreed to include their “projections of appropriate monetary policy” into the Summary of Economic Projections (SEP) beginning in January. The SEP will also unveil “participants' current projections of the likely timing of the first increase in the target rate” given their projections of future economic conditions. Moreover, there will be “qualitative information regarding participants' expectations for the Federal Reserve's balance sheet” and introduction of a more formal inflation-targeting framework.

Chinese Premier Wen Jiabao warned that business conditions in the first quarter of 2012 would be "relatively difficult" and pledged to fine tune monetary policy as necessary. Wen noted "downside pressure" in the economy and "elevated inflation". And that also means "weakening of external demand" and "rising costs for companies". Wen said that government would stabilize both growth and inflation to "promote social harmony". And, China will give priory to "key projects" while limiting "industries suffering from overcapacity". The vice president of the State Council's Development Research Center projected China's growth to be 8-9% over the next two to three years and maintain 6-7% annual growth in the subsequent decade. There are speculations that PBoC would cut the bank reserve ratio again as early as this week to boost liquidity.

On the data front, Eurozone PMI services final, CPI flash, UK construction PMI, mortgage approvals, M4 money supply and US factory orders will be released.

DOW rose to as high as 12479.65 yesterday before paring come gains to close at 12397.3. Whole rise from 10404.49 is still in progress and should be targeting 12876 high. At this point, there is no clear indication of medium term up trend resumption yet. Focus will be on resistance zone between 13000 and 100% projection of 10404 to 12284 from 12231 at 13111 to determine whether rise from 10404.49 is a corrective rebound. In any case, we'll stay bullish in DOW as long as 55 days EMA (now at 11905) holds.