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The US dollar is little changed against most currencies today as a consolidative tone has emerged after last week's losses. Both Canadian and US markets are on holiday and European news is light.

Sterling initially saw new 4-year highs in Asia, encouraged by a strong Rightmove house price survey (asking prices rose 3.3% in February after 1% in January). However, the push through $1.68 proved premature and a bout of profit-taking was seen, sending sterling a cent from its highs before bids were found near $1.6720.

The euro also showed initial follow through gains in Asia, lifting it to almost $1.3725. The pullback was considerably more shallow than sterling experienced and new bids came in just below $1.3700. The $1.3740 area offers initial resistance. Peripheral bonds markets in Europe are firmer, with Italian 10-year bonds outperforming Spain with a 6 bp decline in the benchmark yield compared with 4 in Spain. Recall that after Italian markets closed last week, Moody's upgraded its outlook to stable from negative (maintaining the Baa2 rating). Italy's 2-year yield, off 3.5 bp today is also leading Spain (-1.5 bp).

Investors continue to take Italy's political drama in stride. The junior coalition partner, led by Alfano, wants a new agreement with Renzi. This may take a few more days. In the meantime, former BOI Governor and Finance Minister Saccomanni is the caretaker prime minister. Note that the electoral reform Renzi and Berlusconi have agreed upon will make it hard for small parties, such as the center-right rump of the PdL led by Alfano, to be directly represented in a new parliament.

The yen is little changed against the dollar. Initially in Asia the dollar fell to JPY101.40. However, the disappointing Q4 GDP figures spurred speculation that maybe the BOJ will have to do more after all, and saw the greenback climb back to the JPY102 area.

Growth in Q4 was estimated at 0.3%, less than half of what the Bloomberg consensus forecast. This matched Q3's performance. In addition, the GDP deflator fell 0.4% year-over-year, which is twice the pace the consensus had expected. It renews concerns about a flagging economy as the April 1 retail sales tax looms. Ironically, despite the yen's depreciation, net exports offset in full the rise in private consumption in the last three months of 2013. Business investment rose 1.3% on the quarter, and while this represents some acceleration (0.2% Q3) and is the largest increase since Q4 11, it lagged expectations (~1.8%).

The BOJ's meeting will conclude with a monetary policy statement tomorrow, followed by the monthly economic report later in the week. It is too early to expect any fresh initiatives. That said, some lending facilities are due to expire at the end of next month and could be renewed. In addition, it is nearing quotas for some of its asset purchases and may need to make some technical adjustments in the coming couple of months.

Japanese shares traded higher, with the Nikkei gaining a little more than 0.5%, led by a 2.2% rise in utilities and a 1.2% rise in financials. The technology sector lost a little ground (-0.15%), despite the US NASDAQ setting new multi-year highs, and extended its advancing streak to seven sessions with the pre-weekend advance.

The MSCI Emerging Market Index has also extended its rally today with about a 0.75% gain. It is now about 5.8% off the February 4 low and is at its best levels since January 23. It surpassed the 38.2% retracement objective off the late October '13 high. We have suggested there is scope to test the nearly 4-month old downtrend that is found near 973 toward the end of the week, which is just in front of the 50% retracement near 976. The recovery of the emerging market equities and the stabilization of their currencies will ease some of the potential tensions in the G20 ahead of their meeting next weekend.

Source: Dollar Consolidates, Japan Disappoints