Risk Appetite Is Strong With Solid US Data - 4.1.2011

The dollar rallied throughout the Asia session, in the wake of yesterday's solid ISM report. Gains were most pronounced against the AUD, NZD, JPY, and CHF. EURUSD traded 1.3329-1.3389, USDJPY 80.93-82.18. Equities have had a good start to the new year - the S&P 500 finished up over 1%, and the Nikkei 225 is +1.6% higher at the time of writing, while the US 10y yield is relatively unchanged at 3.37%. The manufacturing ISM index for December rose as expected to 57.0 and the new orders index, the most leading component, also advanced. Details of the report showed a gain in the production component and while the employment index slipped, the reading still indicates net headcount gains. Economists note that the increase in the headline reading leaves the index at a very healthy level and suggests upward momentum at the end of Q4, which is consistent with their forecast of real GDP growth picking up from a +2.6% pace in Q3 to +3.5% in Q4. Construction spending also rose for November, though less than October. Up next are the minutes from the Dec. 14 FOMC meeting, which could shed more light into how officials view the effectiveness of QE2 in the context of the November payrolls disappointment and higher Treasury yields.

EUR

In a piece in Spanish paper El Pais, China's vice-Premier Li Keqian said China will continue to buy Spanish government debt in the future. The comments come ahead of his week-long visit to Spain, Germany and the UK, where the EU's sovereign crisis and potential Chinese help is expected to be high on the agenda.

German manufacturing PMI was softer than expected at 60.7, however the factory jobs index came in at 57.1, the highest in the survey's 14-year history.

The ECB announced it completed Euro164mm of bond purchases under the Securities Markets Program (SMP) in the week to December 31, compared to Euro1.121bn the week before. This brings the total purchases under the SMP to Euro73.5bn.