Dollar Maintains Post FOMC Minutes Gains; ECB, Spain Auctions And Services Data Watched

FOMC minutes released overnight dented hope for QE3 and turned markets into risk averse mode. Asian equities were broadly lower today even though th Dow pared some losses to close just -65 pts down. Gold reacted strongly and is now struggling below the 1650 level and it just had an attempt on the 1700 level last week.

The Dollar Index extends rally on risk aversion and is firm above 79.50 level so far. Further volatility is anticipated today as we'll have services PMI from eurozone, UK and US, ADP employment data as well as ECB rate decision.

The Fed signaled in the March minutes that the chance of QE3 is low unless economic growth falters. The wordings of the minutes were also more hawkish than previous meetings. In the March minutes for the FOMC meeting, it’s signaled that only 'a couple of members' believed further easing is 'necessary if the economy lost momentum' or if inflation falls below 2.0% over the medium term. This compared with the reference of 'a few' members in January and 'a number' of members at the December meeting.

The Fed upgraded its growth outlook slightly to 'moderate' from 'modest'. Yet, it emphasized that 'most participants' did not interpret the intermeeting economic data as 'pointing to a material revision to the outlook in 2013 and 2014' and a 'number of factors' are seen as likely to restrain the pace of the expansion. The balance of risk remained slightly to the downside and policymakers refrained from ruling out the chance of QE3.

The April ECB meeting will see no change in monetary policy. The sovereign debt in the eurozone appeared to have stabilized in recent weeks after approval of the second bailout fund to the Greece and finalization of the PSI scheme. Yet, the problems are far from being resolved. Therefore, the ECB would continue to watch the situation closely.

The 3-year LTRO failed to boost bank lending as much as anticipated by the ECB. While we believe no additional measures are to be announced at the April meeting, the easing bias remained. Indeed, the President Draghi has recently defended ECB operations which resulted in "improvements in the overall outlook".

Meanwhile, Spain will sell as much as EUR 3.5b in 2015, 2015 and 2020 bonds today. Markets are concerned with the fiscal health of Spain as it just presented a 2012 budget yesterday which showed debt-to-GDP ratio will jump to 79.8% this year, up from 68.5% last year, highest since at least 1990 and much higher than EU's recommended 60% ceiling. Portugal will sell EUR 1.25b to 1.5b of T-bills today too.

Aussie is troubled by dismal trade data in additional overall risk averse market sentiments. Trade balance continued to stay in deficit and came in at AUD -0.48b in February. Export was down -2.1% mom while imports dropped -3.8% mom. That's the second consecutive month of trade deficit as January's data was further revised down to AUD -0.97b.