Dollar Loses Ground, U.S. Futures Lift

The dollar is paring back some overnight gains as sentiment modestly improves, with the clarification by S&P and Moody's on the U.S. rating welcomed news. However, despite the modest rise in European stocks, eurozone spreads continue to widen, with Spanish yields higher after this morning's auction.

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Spain sold 2.9 billion euros of three-months bills at an average yield of 5.11%, up from 2.29% at the last auction in October. Adding to the pressure was the fact that a German official sees no new bazooka in debt crisis and confirmation of Elio Di Rupo's departure from Belgium's government may lead to a reaction from the rating agencies. Elsewhere, USD-INR is making a new record high, due to twin deficits, high inflation and the Reserve Bank of India mulling possible action. In the North American session, while many will remain focused on developments in the eurozone, the market will look to guidance from the Fed minutes about the potential for additional easing measures. The minutes could provide insight into how close the FOMC came to adopting the suggestion that the Fed should strengthen its forward-looking guidance by pledging to leave its policy rate at near zero until the unemployment rate had fallen below a certain threshold. The minutes might also highlight the level of support for QE3. Despite the likelihood that dovish Fed policy will be with us for quite some time, near-term FX price action continues to be dominated by events in the EZ, and with no end of the crisis in sight we expect the dollar to remain bid. Support remains near 1.34, with resistance seen near 1.3641. In Europe, Swiss policymakers are likely to be encouraged by the October trade data, which was after the SNB established the EUR/CHF floor at 1.20. The October merchandise trade surplus widened to CHF2.15 billion from CHF1.85 billion and was driven by exports, which rose to CHF17 billion from CHF16.7 billion, while imports only saw a marginal gain. However, GDP contributions from net trade has receded in Q3 and is expected to turn lower in 2012, as the impact from the rise in trade-weighted CHF weighs more heavily on exporters. From here, some observers continue to expect the SNB to react to the potential for deflationary pressures by raising the EUR/CHF 1.20 floor. In Mexico Q3 GDP data is expected to show a pickup in growth to 3.9% year-over-year from 3.3% in Q2. Recent strength in U.S. data suggests the Mexican economy might surprise on the upside. Despite decent fundamentals, MXN (like BRL) continues to underperform during periods of market stress and so we look for a break of the October high in USD/MXN around 14.14.

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