The US dollar strengthened against the yen as stocks in Asia recovered

Previous session overview
The USD rallied into the US close Friday and continued its upward path in Asia Monday as global equity markets slid and investors moved into the greenback for safety.

The euro is on the defensive Monday against the dollar and yen, as concerns continue to mount about the outlook for the eurozone economy.

On Friday, the dollar rose against its European rivals as a decline in U.S. stock markets due to negative corporate earnings news and swirling economic worries sent investors scurrying for the sanctuary of the greenback.

The US dollar strengthened against the yen as stocks in Asia recovered, prompting some to scale back relatively risky carry trades. The Japanese Yen fell against the US dollar due to rising equity markets and a higher-than-expected preliminary reading of the University of Michigan consumer sentiment index for January.

Still, the US dollar remains under pressure and interest rate futures have already priced in a 50 basis point rate cut at the FOMC meeting on January 30th.

Sterling weakened 0.5% against USD after an unexpected fall in UK retail sales in December.

The Australian dollar remains strong after a speech delivered by Reserve Bank of Australia Governor Stevens carried a surprisingly hawkish tone.

The Canadian dollar was higher versus the greenback owing to the rebound in equity markets overnight.

Market expectation
Locally, the main event this week is the OCR review on Thursday. We expect the RBNZ to remain on hold, but to maintain a hawkish tone. Inflation pressures are mounting, but housing is correcting a touch faster than anticipated and there is greater uncertainty around the global outlook. We expect further rate hikes this year.

Today, the US calendar is empty (Martin Luther King Day) and in European there are also no important data scheduled for release. So, global market themes (risk aversion) will continue to set the tone for trading. Looking at the price action recently, this apparently is not really a big help for the single currency at the current juncture.

Looking at the heavy losses on Asian/Japanese stock markets this morning, the gains of the yen against the dollar could be seen as a bit disappointing.

Today, the UK calendar contains the public finance and money supply data. We don't expect these data to have a lasting impact on sterling trading.