Dollar Shows Strength - 9.3.2011

The dollar continued to strengthen gradually during the Asia session. The absence of news, combined with the prevalence of short dollar positions, suggests that an unwind of overstretched positions was likely at work over the past 24 hours. EURUSD traded between 1.3873 and 1.3924 and USDJPY between 82.61 and 82.94. Asian equities are marginally ahead at the time of writing, while the S&P 500 had closed up 0.89%. There are no top-tier releases in the US ahead so positioning and external factors will likely continue to drive currencies. We favor further dollar upside in the medium term on the basis of an improving US economy and continuing Eurozone debt worries.

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Greek and Irish bonds remain under pressure, with their 2y spreads relative to Germany well above the rest of the Eurozone. S&P said it also sees more downgrades for Eurozone countries, though the ratings agency did not elaborate. German factory orders grew faster than expected in January at +16.0% y/y and +2.9% m/m, compared to consensus expectations of +15.6% y/y and +2.5% m/m respectively. ECB Governing Council member Nowotny said that the ECB is strictly keeping to the goal of price stability. Inflation is not seen as a threat if second-round price effects can be contained. He also said that the ECB never pre-commits to interest rates, although did acknowledge that "strong vigilance" is seen as a code word in the markets.

AUD

More Australian economic data from January was released overnight. The latest data show more signs of strain as a result of the flooding in Queensland. Сonsumer confidence has fallen to a nine- month low, and the value of housing finance (excluding refinancing) dropped by 6.4% - the sharpest fall since March 2008.