Lower Oil Supports Dollar

The US dollar was given a lift by Japanese TV reports that the BoJ may opt to leave rates on hold at Thursday's meeting.

Lower oil prices may also have contributed with the benchmark Nymex crude contract now trading at US$51.25/bbl.

In the end EURUSD traded from a high of 1.2975 down to a low of 1.2908, while USDJPY traded up to a high of 120.77 from 120.42.

Yields are slightly lower on the session, due to a weaker-than-expected Empire Manufacturing survey, with the 2 and 10-years down by 2 and 3bp respectively on Tuesday's close.

Rate markets are pricing in little chance of a near-term easing by the Fed and are no longer even fully pricing a cut by the end of this year. Of course, there is always the risk that strong economic data will continue to surface, in which case the market could even consider pricing in the risk of a rate hike this year, in expectation that the Fed could adopt a similar path to the BoE.

The markets should also be a little wary of the ongoing decline in oil prices in the absence of real economic justification. It could be a signal that funding conditions are deteriorating, in which case the current favourable environment could be jeopardized to the detriment of the USD and other high-yielding currencies.

Looking ahead and PPI for December is due at 1330 GMT and the TIC report for November is due at 1400 GMT.