USD Turns Bid: EUR, GBP Share Dollar-Bloc and JPY's Pain

The US dollar is firmer across the board today as investors continue to regain confidence that the FOMC will proceed with its tapering efforts. The impression is that the strength of the retail sales stripped of autos, building materials and gasoline showed an unexpected resilience of the US consumer that does not mesh with the weakness in employment figures. The other thing to be said about US consumption is that it is apparently not being fueled by credit cards.

The greenback was already firm against the dollar-bloc yesterday and those gains have been extended. The World Bank's downgrade of its GDP forecasts for China makes for a convenient excuse to do what the market had begun doing, and that is to sell into the Australian dollar's 5-week high, set Monday in front of the resistance we identified near $0.9100. It reports jobs data tomorrow. A disappointing report could see a move toward the multi-year lows set in mid-December, near $0.8820.

The Bank of Canada meets next week and the string of soft data and official comments has encouraged investors to expect a dovish assessment. The US dollar neared CAD1.10 in early Europe. We suspect the greenback is getting stretched here and perhaps running the stops above there will exhaust the speculative market which, using the futures as a guide, have amassed a large short Canadian dollar position. Initial support is now seen near CAD1.09.

The dollar recovered against the yen yesterday and continued in Asia earlier today, reaching a high near JPY104.50. The dollar's strength and 1% rise in the S&P 500 helped lift the Nikkei 2.5% today. After yesterday's sharply lower opening, today's gains lifted the index back above the 20-day moving average.

The Nikkei's almost 6% pullback since the end of 2013 appears to have been completed. A move above 15855 likely signals a move to new highs. We also note that the out-performance of the JASDAQ over the Nikkei and Topix seen last year is continuing into the early part of this year. The JASDAQ is up 2.3% here in January, while the Nikkei is off 3% and the Topix off 0.6%.

European news has been light and does not really account for the softer euro and sterling tone today. After moving briefly above 20 bp before the US employment data, the two year interest rate differential has been unchanged this week just above 17 bp.

We suspect the euro's pullback can be largely dismissed as technical in nature. That said, a break of the $1.3600 area could signal a return to the 2014 low near $1.3550. We think consolidation is most likely today, with $1.3660 a reasonable cap for the North American session.

Unlike the euro, sterling did not take out yesterday's lows. In fact, it is trading within yesterday's range, which was within Monday's range. Sterling also looks likely to spend the North American session consolidating. The $1.6460-80 area may cap the upside and $1.6260-80, protecting the downside.

News that China's total financing in December, which is typically a soft month, was essentially unchanged though new yuan loans slowed to CNY482.5 bln from CNY624.6, has observers talking about China's shadow banking sector. Yet, in much of the coverage, what is being discussed mostly is the jump in reserves. They stood at $3.82 trillion at the end of the year, up from $3.66 trillion at the end of Q3. The $157 bln increase in Q4 follows the $166 bln in Q3.

Although a PBOC official had indicated toward the end of last year that it was going to move away from such practices, this has not been the case. That said, the figures are flattered by valuation effects and interest payments. So although China's current account surplus has fallen as a percentage of GDP in recent years, the continued rapid accumulation of reserves suggests that an important underlying imbalance remains.

The US session features the December PPI and the January Empire State Manufacturing Survey. The risk on the PPI seems to be on the downside after the weaker-than-expected import prices from the Bloomberg consensus of 0.4%. The Empire is expected to tick up to 3.5 from 0.98 in December. We suspect the risk there too is on the downside, due to the weather. Later in the day, the Fed's Beige Book in preparation for the next FOMC meeting will be released. There is some speculation that the overall assessment will be revised up. After all, the market has generally done the same thing with its upward revision to Q4 GDP forecasts.

Separately, we note that the effort to extend emergency unemployment benefits faltered in the Senate last night. A preliminary vote last week had succeeded as 6 Republicans joined the Democrats to extend benefits for 3 months. However, Democratic leadership changed the final bill to extend the benefits for a full year, without funding it. The Republicans withdrew their support and the bill failed to secure 60 votes. The issue may not be dead, but the delay could see a large drop in the participation rate when the January data is reported in early February.