Greenback Slides Ahead Of FOMC As Optimism Underpins Risk Appetites

Overview: The S&P 500 snapped a four-day downdraft helped by optimism over the progress toward fiscal stimulus and some hope that a new trade deal can still be negotiated between the UK and EU. Europe reported better than expected PMIs.Equities are broadly higher, as are interest rates, while the dollar slumps. The MSCI Asia Pacific Index rose for the first time this week, while Europe's Dow Jones Stoxx 600 is up for the third session and at a new 10-month high.US stocks are extending yesterday's gains. Benchmark 10-year yields are edging 2-3 bp higher today in Europe. The 10-year Treasury yield is firm around0.92%. The greenback is trading lower against all the majors but the Canadian dollar. The euro has pushed above $1.22 and sterling above $1.35.Emerging market currencies are also mostly higher, and the JP Morgan Emerging Market Currency Index is at new 10-month highs. The Bannockburn World Currency Index (GDP-weighted) is at its best level since May 2018. Gold is extending yesterday's strong gains and the next target is last week's high near $1875.Recovery hopes lift crude prices. The January WTI contract is approaching $48, while Brent is testing $51.  

Asia Pacific

On a day of economic beats, Japan disappointed.  First, the November trade surplus was less than expected at almost JPY367 bln. Exports were forecast to rise by 0.4% but instead fell by 4.2% year-over-year, and imports, which were to have fallen by 9.5%, dropped 11.1%. Of note, exports to the US were off 2.5%, to Europe, down 2.6%, while shipments to China rose 3.8%. Second, Japan's preliminary PMI was mixed, but the manufacturing gain (49.7 vs. 49.0) was more than offset by the slippage in services (47.2 vs. 47.8). This saw the composite edge lower to 48.0 from 48.1. The yen's strength today appears to be more a function of a weak dollar.  

In contrast, despite the elevated tensions with its biggest trading partner, Australia's PMI showed the recovery gaining momentum. The manufacturing PMI rose to 56.0 from 55.8. The services PMI rose to 57.4 from 55.1. That translates into the composite reading of 57.0 after 54.9 in November. Recall, last December, the composite was at 49.6, the second consecutive month below 50. Note that tomorrow Australia reports November employment data, which is the key to the central bank's policy outlook. 

The dollar is posting its first back-to-back decline against the Japanese yen this month. It is on its lows near JPY103.25 late in the European morning. The low since the spring chaos was set in early November, a little below JPY103.20.The JPY103 level offers psychological support reinforced by an option for roughly $350 mln that expires today. The low set in early March was closer to JPY101.20.The BOJ meets this week but is unlikely to say much about the yen's exchange rate. The yen's gains lag behind most others in Asia, including the Chinese yuan and the G10 over the past few months. The Australian dollar is firm near $0.7575.The next target is the $0.7600-$0.7625 area. Initial support is seen around $0.7550. The weak dollar keeps the Chinese yuan firm. The PBOC set the dollar's reference rate at CNY6.5355, a little stronger than expected. The two days of yuan gains have offset the five-day downtrend that it snapped. Support is seen near CNY6.52 and then CNY6.50. 

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Read more by Marc on his site Marc to Market.

Disclaimer: Opinions expressed are solely of the author’s, based on current ...

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