Risk assets gain

US dollar edged lower against the local currency.

IG Markets Singapore noted:

The greenback edged a little lower against the SGD, but we remain relatively range bound with the key support of 1.2240 remaining in focus.

If the risk-on sentiment continues to weaken the USD then we could see the 1.2160-80 range tested once again, as was seen a couple of times last month.

Following another strong bond auction in Spain, the euro rose to trade above 1.337 against the USD as risk assets gained.

Better-than-expected US jobs and housing starts figures also propped risk asset advances as the 12.1% increase on housing starts indicated a pick-up in economic growth and employment levels.

Meanwhile in Asia, yen traders are keeping their eyes on any hint of development on Japan’s dovish monetary stance at its two-day meeting starting next Monday. Yen bears may already be positioned for the expected asset buying top up and any additional easing measures announced next week may result in a ‘take profit on news’ situation.

The yen weakened further to its all-time low, trading above 73.4 yen per SGD. On the technical side, USD/JPY briefly touched its resistance level of 90 before retracing back a tab lower.

DBS Group Research meanwhile reported:

For the world’s major economies, the theme at the start of this year has been about “reversals”. Together, they have led to stable to firmer EUR/USD, a higher USD/JPY, and a lower USD against the CNY and Asia ex Japan currencies.

In Eurozone, European Central Bank (ECB) President Mario Draghi said last week that there was considerable progress in repairing the fragmentation that threatened the stability of Eurozone. Draghi also admitted that the euro exchange rate, while not a policy target, was a very important element for Eurozone to achieve growth and price stability. On this count, the ECB was probably glad that stability has returned to the euro, as evidenced by its recovery to its long-term average.

Similarly in Japan, the yen exchange rate has also become paramount for the economy. Except that the newly elected Abe government is championing a weaker yen exchange rate to help Japan emerge from deflation. Economy Minister Akira Amari clarified yesterday that despite the yen’s depreciation since mid-November, the yen was still correcting its excessive strength even with USD/JPY nearing the 90 level. With Eurozone favoring stability in euro, and Japan a weak yen, the EUR/USD cross rate looks set to maintain its uptrend.

Today, the focus will be on China. Between early December and mid-January, the Shanghai Composite Index rallied almost 20% from its lowest level since January 2009 to its highest level since April 2012 on hopes that China has reversed its economic slowdown. Consensus expects real GDP growth to pick up, for the first time since 1Q10, to 7.8% YoY in 4Q12 from its low of 7.4% in 3Q12.

From here, China is expected to return to a higher growth path above 8% for this year and next. This expectation has brought back yuan appreciation expectations. The outright 1-year non-deliverable forward rate for USD/CNY has now converged with the official parity fixing. It was not too long ago that the offshore rate was, from May to September 2012, trading above the ±1% official trading band of the onshore exchange rate, worried about a hard landing.

As for the US, the main reversal story has been the recovery in the housing market and the jobs market. With the US preoccupied with consolidating its fiscal finances, the Fed is in no hurry to end its QE3, which it sees as necessary to nurture a still-fragile US economy. On this count, the US dollar has stayed weak, not only against the Chinese yuan, but also against Asia ex Japan currencies.