Mid-Day Report: Euro and Yen Selling Dominates the Markets

While some's focus may be on dollar's rally today, it should be Euro's weakness that should be paid most attention to. As mentioned before, Euro's rally in Dec was fueled by speculation that ECB will pause rate cutting in Jan but markets are getting increasingly doubtful on this. More Euro long positions are closed after ECB Vice-President Papademo's comment that deflation is becoming a convern and ECB will do what is necessary, in terms of the timing and in terms of the size (of interest rate policy action) to ensure that price stability is preserved. There is also continuous profit taking ahead of tomorrow's flash HICP release from Eurozone.

Euro's selling in crosses, including against EUR/GBP, EUR/AUD, EUR/CAD is indeed pushing theses currencies slightly higher against the greenback. On the other hand, yen's broad based weakness is also helping those higher yield currencies on improved risk appetite. Dollar is also supported by news that US President-elect Obama's fiscal stimulus package will help US recover quickly from recession.

Nevertheless, the weakness in Euro and Yen alone are enough to send the dollar index higher to as high as 83.16 so far, touching mentioned 83.11 cluster resistance (50% retracement of 88.46 to 77.69 at 83.07) as expected. The development so far is consistent to our view that sharp fall from 88.46 is merely a three wave correction and has completed at 77.69. Sustained break of 83.11 will add more credence to this case and pave the wave to retest 88.46 high. Meanwhile, below 81.38 minor support will turn intraday outlook neutral first.

Data released today saw US construction spending dropping -0.6% in Nov, better than expected -1.3%. Eurozone Sentix Investor confidence in January recovered to -34.4( consensus: -44)from a record low of -42.3 in December, after ECB's interest rate cut as well as the government's stimulus plans. In the UK, construction PMI in December plummeted to 29.3 (consensus: 30.5, November: 31.8), the lowest level since the survey started in 1997. Although Switzerland's SVME PMI in December unexpectedly rose to 36.9 from historical low of 35.2 in November, it signaled the 4th month of contraction and indicated the country's industrial activities deteriorated rapidly particularly in the last 2 months of 2008. The improvement in December was brought by the output component while all others recorded decline last month.