High beta currencies continued their correction on the second night of trade this week following equities lower as both the dollar and the yen strengthened mildly in a relatively quiet Tuesday session. With economic calendar once again barren trading was dominated by central bank news with both BOJ and RBA announcing rate decisions tonight.

Markets today are exhibiting the usual signs of uncertainty in light of a new month that has not exactly gotten off to the best start. Among currencies, the Euro, Pound, Canadian dollar, and Australian dollar all showed weakness against the dollar. USD/JPY on the other hand clearly exhibited dollar strength, as a surge to 101.00 is currently under way. The one currency that has managed to buck the trend has been the New Zealand dollar which only narrowly is holding on to gains. Nevertheless, the main driving force is the drop on the Dow today. However, as a sign of resilience in even a down market, the Dow rebounded off of exaggerated losses that extended down by nearly 150 pips to close down 41.74.

With no fireworks from this weekend’s 3 big event risks, the rallies in the currency and equity markets are fizzling. Having been up more than 150 points intraday, the Dow Jones Industrial Average ended the U.S. trading session down 7 points. This lack of follow through was replicated in the foreign exchange market with the Euro and British pound giving up earlier gains. Promises can only take the markets so far and the lack of concrete actions by the G20 has disappointed investors. Although we have previously mentioned that bear markets can rally as much as 25 percent, today’s intraday reversal is worrisome. Looking at the economic calendar this week, there is not much event risk to energize investors

Currencies and equities have strengthened across the board suggesting that risk appetite may be improving. The dollar, which has been a refuge for safe haven flows, fell against all of the major currencies except for the Japanese Yen. In fact, the rally in USD/JPY has been voracious with the currency pair rising 2.5 percent to an 11 week high. The move today has been driven by a variety of factors, none of which in our opinion are meaningful enough to sustain the rally.

The US dollar traded lower today as safe haven demand subsided. New fiscal stimulus has been announced in Australia and Japan leading US investors to hope that similar help is around the corner. The full Senate is expected to vote on the $885 billion stimulus package this week and the prospect of a swift approval is having a big impact on the currency market. Politics is overshadowing economics and in that same vein, any delays in getting the money into the hands of Americans could derail the greenback.

After falling for 3 straight months, we have finally seen a recovery in pending home sales. Falling home prices and lower interest rates have boosted the number of Americans signing contracts to purchase homes by 6.3 percent in the month of December.

The US dollar continues to rise, but the rally is tempering. After sharp losses this past week, the Euro, Japanese Yen and Australian dollar are beginning to stabilize against the greenback. US equities have been in the red throughout the day, which is why most currencies remained negative despite sharp intraday reversals. Over the next week, the US dollar faces 3 big threats that all traders and investors should be aware of – a bad bank plan, central bank intervention and economic data: