Talking Points

• US Dollar Sold as Fading Eurozone Stress Buoys Stocks in Asian Trade
• Italian Bond Sale in Focus as Next Driver of Short-Euro Profit Taking
• US Consumer Confidence Expected to Yield 7-Month High in January
• JPMorgan Guidance Seen as Gauge of US Banks’ EU Crisis Exposure

TheUS Dollar (ticker: USDollar) declined against most of its major counterparts in overnight trade as Asian stocks advanced, sapping demand for the go-to safe haven currency. The MSCI Asia Pacific regional benchmark equity index added 0.8 percent afterItaly andSpain held successful bond auctions yesterday. Rome sold €8.5 billion in 1-year bills, with average yields tumbling to 2.74 percent from 5.95 percent at an auction of similar paper in December. Madrid sold nearly €10 billion in new debt – twice the targeted amount – with average yields on 3-year notes falling to 3.38 percent from 5.19 percent in December.

Meanwhile, the ECB deposit facility saw its fist drawdown in five days, with banks parking €15.3 billion less with the monetary authority (for a total of €471 billion) than the previous day (the record-high €486 billion). Taken together, these developments encouraged hopes that the nearly €500 billion that the ECB lent Eurozone banks in December was actually making its way into financial markets, bearing down on borrowing costs and helping high-debt member states refinance maturing obligations at sustainable rates, thereby reducing the chance of a default within the currency bloc.

Supportive rhetoric at yesterday’sECB monetary policy meeting has also helped. Bank President Mario Draghi said policymakers were seeing “tentative signs” of stabilization in the economy, albeit warning of “substantial downside risks” still in the mix. Perhaps most importantly, Draghi said the ECB’s 3-year LTRO gave banks liquidity insurance, preventing a major funding constrain and going to far as to directly address concerns that funds provided through the facility were being hoarded in the ECB’s deposit facility. On this front, Drahi said the banks that borrowed through the LTRO were not the same as those pushing deposits to record highs, adding that the bank is seeing that money flow into the broad economy.

Looking ahead, the spotlight turns to anotherItalian bond auction, this time of longer-term paper across 2014-2018 maturities. Generally speaking, longer-term bonds are considered riskier (and so pay higher returns) because they expose their holders to larger periods of uncertainty, so another drop in average yield levels similar to yesterday’s bill sale will be an important encouraging sign. While the Eurozone crisis is far from resolved, there is plenty of profit-taking to be done on signs of reduced credit market stress after speculative net-shortEuro positioning hit another record high last week. Later in the session, the University of Michigan gauge ofUS consumer confidence is expected to rise to the highest in seven months.

Stock index futures are trading higher ahead of the opening bell in Europe, bolstering the case for an upswing in sentiment through the week-end and hinting the greenback will remain on the defensive against itsrisk-linked counterparts. The fourth-quarter earnings report fromJPMorgan Chase may be a countervailing force however, with earnings expected to drop 34.7 percent to $0.901 per share. The forward-looking guidance component of the report ought to prove most interesting however as traders look for insight on US banks’ vulnerability to Eurozone sovereign stress.

Asia Session: What Happened

Euro Session: What to Expect

Critical Levels

---Written byIlya Spivak, Currency Strategist forDailyfx.com

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