Buck Bounces Back, But Unlikely To See Much Follow Through

In thin Asian trading, with the Japanese markets closed for holiday, theUS dollar's pre-weekend losses were extended. However, European participants took advantage of that pullback to buy more dollars. A similar reversal of sentiment was evident in the equity markets. The MSCI AC Asia Pacific Index, excluding Japan, was off 0.2%, while European shares are broadly higher. The Dow Jones Stoxx 600 is up 1% near midday in London. Utilities are lagging, but the only sector down in Europe is energy. Oil prices have extended their decline and Brent is making new lows

Fundamental developments are light on the ground. However, the market is focused on European negatives more than dollar positives. The negatives include the prospect of further easing of monetary policy through sovereign bond buying and the political challenges offered by Greece immediately (January 25) and then Italy and Spain further out. That said, 10-Year Greek bonds are rallying today along with Spain and Italy.

In Japan, there was an election in the Saga prefecture. We had noted that the election for governor pitted Hiwatashi, a reform candidate, backed by Prime Minister Abe, against Yamaguchi, who enjoyed the support of the some local LDP and Japan's Agricultural Cooperative (JA). JA is seen as a powerful force against the agricultural reforms that Abe is pushing under the cover of the Trans-Pacific Partnership. Yamaguchi's victory in Saga illustrates the challenges facing Abe's third arrow of structural reforms, despite the ruling coalition maintaining its super-majority in the December election.

Fitch downgraded Russia to its lowest investment grade status before the weekend, which had been well anticipated. However, the continued drop in oil prices, the Russian ruble has come under new selling pressure today, losing 1%. In fact, along with the ruble, the central European currencies are the weakest among the emerging markets today.

Chinese stocks fell during the last two sessions of last week and fell today as well. The three-day losing streak is the longest since November. A new flurry of IPOs are expected this week that will drain as much as CNY 2.1 trillion from the banking system and tightening liquidity. Tomorrow, China reports trade data. Exports are expected to have risen 6% while imports slump 6.2%. Even though Chinese reserve growth has slowed, we suspect that its rising trade surplus will once again raise the ire of some US politicians, and could be picked up in the next treasury report on foreign exchange. The yuan's appreciation from May through October last year has been largely reversed.

The heavy slate of US economic reports this week begins slowly with the Fed's new Labor Market Conditions. This is a composite index of many dimensions of the labor market, with the Fed recognizing that the unemployment rate itself is less useful due to the decline in the participation rate. Studies suggest that about half of the decline in the participation rate is due to the retiring baby boomers and about a third to younger cohorts choosing to go back to school. That still leaves some room for cyclical improvement to help lift the participation rate provided the labor market continues to heal.

US participants may focus more on the weakness of US wages seen in last week's employment report. This may be reflected in the short-end of the debt market, like the eurodollar futures, and may not be as willing to extend the greenback's gains today. The short-term (hourly) technical signals are consistent with this view of a consolidative North American session, as opposed to a uptrend day for the dollar.