After some volatility overnight, dollar seems to be gathering some momentum against other currencies in Asian session. Markets were somewhat disappointed by Fed's announcement to expand the Operation Twist Program by $267b. But there sentiments were lifted by German Chancellor's comment on the possibility of using European bailout funds to purchase Spain and Italian debts. Then but Asian markets were then back under pressure after China's manufacturing data. Asian equities are broadly lower at the time of writing and overall sentiments dragged down Aussie and loonie lower. Meanwhile, note that Euro's rebound against dollar overnight was relatively weak as EUR/USD was limited below 1.2747 high of the week, set on Monday. The common currency will face tests of Spain auction and Eurozone PMIs later today and will remain vulnerable.
As we had anticipated, the Fed decided to extend operation twist through the year-end, instead of implementation of QE3, in June. With the amount of $267B, the pace of asset purchases and sales would remain unchanged. To our surprise but indeed a positive sign, the Fed maintain the reference of keeping interest rates at exceptionally low level at least through late 2014, rather than delaying the timing of the first rate hike. Economic forecasts were markedly downgraded. The Fed retained the possibility of further easing but this would depend on the job market situation. There were 2 additional members at the meeting, Governors Jeremy Stein and Jerome Powell, present at the meeting.
German Chancellor Merkel said that while there is "no concrete planning", there is "possibility" of buying sovereign bonds on the secondary markets. Nonetheless, she clarified it's a "purely theoretical statement about the legal situation" and is "not up for debate" for the moment. Greece's political impasse ended on Wednesday as New Democracy leader Samaras was sworn in as the fourth prime minister in eight months. All three coalition parties, including Pasok and Democratic Left, backed further austerity but will also push for negotiation of better bailout terms. Former finance minister Venizelos said that the June 28-29 EU summit will be the "first big battle on the revision of the bailout agreement, the creation of a framework that will allow us to move to positive growth and to combat unemployment, which is the big problem of Greek society". In Spain, firstly, treasury will auction EUR 2-3b of bonds due in 2014, 2015 and 2017 today. Secondly, independent audit of the countries' banks will be due today and should help Spain decide how much of the EUR 100b bailout fund is needed for the banking sector. Spanish 10 year yield has retreated back to around 6.7/8% yesterday, after making an euro era record of above 7%.
In China, the preliminary HSBC manufacturing PMI index dropped for another month to 48.1 in June. That's the eight straight month that the index stays in contraction region below 50 and matched the streak during 2008 financial crisis. Note that the new export orders sub-index dived to 45.9, lowest level since 2009. Some analysts criticized that China's easing policy so far was no enough and urged the government to do more to stabilize the slowdown.
On the data front, New Zealand GDP showed 1.1% qoq growth in Q1, beat expectation of 0.4% qoq. Eurozone PMIs will be a focus today together with UK retail sales. In US session, Canadian retail sales, US jobless claims, Philly fed survey, house price index and leading indicators will be released.
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