Dollar Gains By Default

Overview: The rally in equities is threatening to pause today, even though the few markets open in Asia edged higher. Europe's Dow Jones Stoxx 600, which has advanced in eight of the past ten sessions and six in a row, is seeing some profit-taking pressures. US shares are also trading heavier in Europe. The S&P 500 has a five-day rally in tow but looks poised for some backing and filling action. Benchmark 10-year yields are mostly lower, with the notable exception of Italy, which could be a little concession ahead of the bond sale and/or concern that a new long-term loan facility by the ECB is not imminent. The US dollar is stronger than most major and emerging market currencies, underpinned by a less hawkish comment from the Governor of the Reserve Bank of Australia and a large drop in German factory orders. Meanwhile, oil prices are heavier as the pullback from the recent highs continues, while force majeure in by Vale is lifting iron ore prices.  

Asia Pacific

After disappointing the market yesterday by not seeming to recognize the economic headwinds, the Reserve Bank of Australia Governor Lowe delivered the message investors wanted to hear. He acknowledged the foreign and domestic risks and confirmed that policy has shifted from a tightening bias to a more neutral setting. The market is pricing in almost a 50% chance of a cut by the end of the year. Australian rates fell sharply on Lowe's comments. The two-year yield shed nine basis points to almost 1.70%, and the 10-year yield fell six basis points to 2.18%, the lowest in a month. The Australian dollar was sent reeling. Near $0.7135, the Aussie is off about 1.4%, the most in more than a year.  

With many markets still on the New Year holiday and the light news stream from Japan, the focus is on developing Asia. Indonesia surprised with stronger than expected Q4 GDP (5.18%). The rupiah is one of the emerging market currencies to gain against the dollar today. India's central bank meets tomorrow, and while many expect a neutral stance, there is a risk of a cut in rates as inflation is at an 18-month low, and the domestic impulses are weak. It may not be the base case, but of the central banks meeting this week (Thailand and Philippines), it is where the risk of a surprise seems greatest.

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Read more by Marc on his site Marc to Market.

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