Markets Await Outcome of Eurozone Debt Auctions - 10.1.2011

The dollar see-sawed during the Asia session. Some dollar strength at the open eventually gave way to selling after remarks out of China recommended additional FX reserve diversification. EURUSD traded 1.2867-1.2930, USDJPY 82.94-83.29. December non-farm payrolls increased by fewer than expected, rising by only +103k (cons. +150k). The unemployment rate unexpectedly fell sharply to 9.4% (cons. 9.7%, prev. 9.8%), but this was largely due to a contraction in the workforce. Fed Vice-Chairman Yellen offered a spirited defence of the Fed's decision to embark on quantitative easing in general, and the latest round in particular. She identified three channels through which these purchases could help, citing "a reduced cost of credit to consumers and businesses, a rise in asset prices that boosts household wealth and spending, and a moderate change in the foreign exchange value of the dollar that provides support to net exports." Yellen was critical of suspicions that the Fed's asset purchases were designed "to promote U.S. growth at the expense of other nations by depreciating the dollar". She noted that, by stimulating domestic growth, QE is also likely to boost demand for foreign goods in the US, and thereby promote growth abroad. Chicago Fed President Evans, a 2011 FOMC voter, said the threshold is high for making any adjustments to the Fed's policy stance, but that he is keeping an "open mind" about whether the Fed needs to go beyond the proposed $600 bn in Treasury purchases. Minneapolis Fed President Kocherlakota also showed little sign that he would vote for a premature end to QE2.

EUR

Pair EURUSD remains bearish after the technical break of the key 1.30 level last week and we expect that this will likely to attract further selling. Additionally, the market is becoming increasingly concerned about the looming surge in Eurozone sovereign issuance. Reuters cited an unnamed "senior Eurozone source" who claimed that Portugal is being pressured by France and Germany and others to request financial assistance from the EU/IMF. The source noted that no talks on a potential aid package have yet taken place, although Portugal's bond auction on Wednesday could be a trigger for an activation request for assistance. Reuters also reported that Portugal is in the process of making a private placement of bonds to diversify its investor base. The report cited an unnamed spokesperson at Portugal's finance ministry who declined to comment on the identity of the potential buyer. Portugal's maiden bond auction for 2011 is scheduled for Wednesday. Germany's Christian Social Union, an ally of Chancellor Merkel's Christian Democratic Union, released a policy paper stating that the ECB should focus on its core role of fighting inflation, and that the bond-buying strategy must be capped.

AUD

November retail sales came in exactly in line with expectations, rising only +3% m/m (prev. -0.8%). After the unseasonally wet weather and flooding through December and January, economists expect only a modest pick-up in retail in the near term. The data reinforces the view that the RBA will be on hold for most, if not all, of H1.