Mid-Day Report: Dollar Retreats Further but Near Term Support Still Intact

Dollar weakens against most major currencies in early US session but the weakness is so far limited well above key near term support levels against Euro, Swissy and Aussie. Otherwise, the markets are lacking a clear direction ahead of key event risks later this week. Stocks are mostly flat while commodities are also bounded in tight range. The economic calendar is rather light today with US pending home sales only, which unexpectedly rose 6.3% to 87.7 in Dec, first rise in four months. Fed said it will extend the emergency lending programs and foreign currency swap lines by Six months through Oct 30 as there are still "continuing substantial strains in many financial markets."

Germany retail sales unexpectedly declined by 0.2% mom (consensus: +0.5%) in December while November's reading was also revised down to a fall of 0.1%. On yearly basis, the gauge dropped 0.3% following the revised 3.2% fall in the previous month. Eurozone's PPI contracted 1.3% mom in December, worse than consensus of 1.1% but better than the revised 2% drop in November, as falling energy and food prices caused great disinflation in the 16-country region. Although ECB said explicitly that interest rate will remain unchanged in February, we believe aa big cut will be seen in March. On annual basis, PPI rose 1.8% in December, slower than 2.1% as market anticipated and 3.3% in the previous month. In Switzerland, trade surplus in December narrowed to CHF 220M from a revised CHF 2250M in the previous month as exports dropped severely by 13%.
On the other hand, UK's construction PMI showed some upside surprise as January's reading rose to 34.5 from 29.3 a month ago. Despite the improvement, it's the 11th month that the index came in below 50, indicating contraction in the sector.
In Asian session, the RBA lowered interest rate by another 100 bps to 3.25%, the lowest level since 1964 as "'there was a significant deterioration in world economic conditions late in 2008". The central bank has reduced its policy rate by 400 bps since September 2008. The Australian government also announced it will roll out an AUD 42B stimulus plan over this and the next 3 fiscal year so as to prevent the country from falling into recession. The package includes AUD 12.7B in grants from next month to families and low-income earners and AUD 28.8B on infrastructure. The plan will, however, send Australia's budget into an AUD 22.5B deficit, the first shortfall since fiscal 2001-02. RBA believes that "the combination of expansionary monetary and fiscal policies now in place will help to cushion the Australian economy from the contractionary forces coming from abroad." Also released from Australia, trade surplus narrowed to AUD 589M in December, worse than market expectation of AUD 1050M and the revised AUD 979M in November, as cola and metal exports declined.
BoJ said it will buy 1 trillion yen of shares held by financial companies. BoJ will buy equities through Apr 2010 to boost capital of financial institutions.

USD/CHF Mid-Day Outlook
Daily Pivots: (S1) 1.1565; (P) 1.1624; (R1) 1.1672;
USD/CHF failed 1.1714 resistance and retreats sharply since then. With 1.1515 minor support broken, intraday bias is turned neutral. Though, as long as 1.1313 support holds, rise from 1.0366 is still in favor to resume. Above 1.1714 will target a retest of 1.2248/96 resistance zone. However, note that further break of 1.1313 support will confirm that rebound from 1.0366 has completed and will bring deeper decline towards 1.0864 cluster support.

In the bigger picture, current favored interpretation is that medium term rise from 0.9634 has topped at 1.2248 orthodox top rather than 1.2296. In other words, three wave structure of the fall from 1.2258 to 1.0366 argues that it's merely a correction in the medium term up trend. Rise from 1.0366 should now extend to retest 1.2248/2296. Nevertheless, decisive break of the resistance zone is needed to confirm resumption of medium term rise from 0.9634. Otherwise, some large scale consolidation could be seen, with risk of another test of 1.0366 before up trend resumption. Below 1.0864 will bring another down leg of the consolidation to 1.0366 and below.


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