Daily Report: Dollar Weakens as Yields Fall again, Swissy and Yen Remain Strong

Dollar volatility continued to be driven by treasury yield this week's thin market. Yields once again fell after the $29b auction of seven-year notes surprisingly drew solid demand. Bid-to-cover ratio was at 2.86 comparing to 2.63 at November's sale. More importantly, indirect bidders, which is viewed as a proxy of foreign buyers including central banks, took 64.2% on offer, highest since June 2009 and was much stronger than average of 49.9% for the past four auctions.

Dollar was back under pressure after the auction and weakness extends to Asian session today, sending dollar to new record low against Aussie. Meanwhile, Swissy and Yen remains firm on safe haven flows. Note that the yen is also strong against dollar on repatriation flows. While that might not be a tremendously large amount of money, the flows help over-extends recent strong moves in the Japanese yen.

HSBC and Markit released its finding for China's PMI. The reading fell, for the first time in 5 months, to a 3-month low of 54.4 in December from 55.3 in the prior month. The slowdown was mainly driven decline in 'output' and 'new orders' growths, while 'employment' expanded faster at 51.5 in December compared with 50.2 previously. According to HSBC, the slowdown is disinflationary but is not sufficient to contain inflation. China will likely accelerate tightening measures, including further rate hikes, to fight against inflation. Other data released saw Japan Manufacturing PMI improved to 48.3 in December.

Looking ahead, US jobless claims are expected to ne steady at 415k. Chicago PMI is expected to droop slightly to 61 in December. US pending home sales is expected to rise 2% mom in November. Weekly crude oil inventories and natural gas storage will also be released.

Dollar index's strong recovery was brief and is back pressing 79.55 support for the moment. Break there will confirm that rebound from 78.83 is finished at 80.82. Also, this will suggest that whole decline from 81.44 is resuming. Further break of 78.83 will target key near term support level in 77.97.

USD/JPY Daily Outlook

Daily Pivots: (S1) 81.33; (P) 81.89; (R1) 82.18; More.

USD/JPY's fall resumes after brief recovery and reaches as low as 81.28 today so far. Near term outlook will remain bearish as long as 82.53 resistance holds. Current decline should continue for a test on 80.29 low or even further to 79.75 key support level. On the upside, above 82.53 will 82.53 will indicate that a short term bottom is formed and bring lengthier consolidation before staging another decline.

In the bigger picture, with 85.92 cluster resistance (38.2% retracement of 94.97 to 80.29 at 85.89) intact, there is no confirmation of reversal yet and the longer term down trend in USD/JPY is possibly still in progress for another test on 79.75 (1995 low). Again, note that downside momentum is clearly diminishing with bullish convergence condition in weekly MACD. We'll continue to focus on reversal signal on next fall.

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