The Dollar Index Extends Gains Into The Sixth Consecutive Session

Overview: The capital markets are on edge. The week's big events lie ahead. The Bank of Canada meets today and the ECB tomorrow, followed by US (and Canada) employment data on Friday. The equity markets are mixed. While Japan and Korean equities eased, China's markets continue their tear. The Shanghai Composite rose 1.5%, the fourth consecutive advance, and closing in on its ninth weekly rise. Yes, it has risen every week this year.  European stocks are narrowly mixed, and the Dow Jones Stoxx 600's four-day rally is at risk. It has moved higher in all but one week this year. The S&P 500 is consolidating around 2800 but has failed to close higher in five of the past six sessions. Benchmark 10-year bond yields are lower across the board. Australia's 10-year yield tumbled 6 bp after the disappointing GDP, leading today's move. European benchmarks are mostly around two basis points lower. The US dollar enjoys a firmer tone against the major currencies, except the yen, where it is stalling around JPY112. The euro continues to straddle $1.13. The Australian dollar is the weakest of the majors, off around 0.8% to about $0.7025, the lowest level since January 4, while the lack of progress in Brussels is pushing sterling lower for the fifth session.  

Asia Pacific

Australia's economy expanded a disappointing 0.2% in Q4 18. The median forecast was for a 0.3% increase. The year-over-year pace slowed to 2.3% from 2.7% (revised from 2.8%) and below expectations. Reserve Bank Governor Lowe is stuck to his neutral stance, though the market continues to move toward discounting a rate cut. The RBA's optimism, like we will hear from the ECB tomorrow, rests on the traditional relationship between employment and wages, which many suspect has broken down. Lowe argues the strong employment may lift wages boost consumption and offset the decline in property prices.  

The Bank of Japan meets in the middle of the month, but there is talk that it may downgrade its output and export outlook. Exports fell 8.4% year-over-year in January, and exports to China fell twice as much.  Last month, Governor Kuroda threatened to consider additional measures if the yen's strength weakened the economy. The economy has softened, but Kuroda is likely to repel any attempt by the dovish members to easy policy now. It is difficult for Prime Minister Abe to back away from the October sales tax increase. Although the government is trying to offset it with some other consumer incentives, past hikes have disrupted the economy, and as the implementation draws close, there will be more concerns expressed about its likely impact.  

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Read more by Marc on his site Marc to Market.

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