Japan Downgraded, Japannese Yen Drops

*U.S. Dollar* Trading (USD) the dollar was able to fund support
overnight after S&P downgraded Japan and stock markets stalled. Weekly
Jobless Claims were weak jumping to 454k vs. 405k forecast and Durable
Goods also fell -2.5% in December. In US stocks, DJIA +4 points
closing at 11989, S&P +3 points closing at 1299 and NASDAQ +15 points
closing at 2755. Looking ahead, Q4 GDP forecast at 3.5% vs. 2.6%
previously Q/Q.

The *Euro* (EUR) pushed higher into the 1.3700 region as sentiment
towards the single currency continues to improve with traders noticing
CEB's Bini-Smaghi comments that the recent rise in inflation is hard
to ignore. EUR/USD traded with a low of 1.3635 and a high of 1.3760
before closing at 1.3730. Looking ahead, December M3 Money Growth
forecast at 2% vs. 1.9% previously.

The *Japanese Yen* (JPY) was a big mover yesterday as S&P downgraded
Japan to AA- on the back of a 'lack of a coherent strategy' to deal
with their debt situation. USD/JPY moved from Y82 to Y83 very quickly
before consolidating the move for the rest of the session. Overall the
USDJPY traded with a low of 82.00 and a high of 83.23 before closing
the day around 82.75 in the New York session.

The *Sterling* (GBP) pushed towards 1.6000 before reversing into the
close on USD strength and market wide profit taking. GBP/JPY was
boosted by the Japanese downgrade and is well positioned for further
upside. Overall the GBP/USD traded with a low of 1.5878 and a high of
1.5994 before closing the day at 1.5930 in the New York session.

The *Australian Dollar* (AUD) was hurt by the Japanese Downgrade and
pullback in Gold overnight falling below 0.9900 after testing parity
in Asia. Also weighing on the Aussie was the proposed flood levy
announced yesterday but the Federal government. Overall the AUD/USD
traded with a low of 0.9873 and a high of 1.0003 before closing the US
session at 0.9915.

*Oil & Gold* (XAU) continued to find heavy selling pressure in the US
session on further liquidation from investors. Overall trading with a
low of USD$1310 and high of USD $1348 before ending the New York
session at USD$1315 an ounce. Oil's volatility continued down towards
the key $85 level. WTI Oil Closed -$1.69 at $85.60 a barrel

Source: ActionForex.Com

READ MORE - Japan Downgraded, Japannese Yen Drops

Japan's Downgrade is a Warning Shot

* Japan's credit rating gets cut by a large credit rating agency,
causing investors to rush to safe havens. The dollar gets a boost
* But unanimous Fed decision last night, reaffirms the Fed's
commitment to further QE
* Even though the UK economy stalled in Q4, traders are pricing in
rate hikes from the Bank of England as early as next month!

*Japan:*
The credit crisis that has consumed peripheral Europe for the past
year, might be shifting to other indebted nations around the world.
Today Japan's credit rating was cut by one notch to AA- with a stable
outlook, due to Japan's lack of a credible fiscal strategy. This makes
the reigning DPJ's plans to implement a controversial sales tax even
more urgent to try and being down its massive public debt, which is
currently at 200 per cent of GDP.

What is the impact on the yen? While the initial "shock" of the
downgrade caused a flight out of the yen and a move into the relative
safety of the dollar, USDJPY hasn't so far been able to sustain gains
above 83.00, likewise, EURJPY initially spiked, but has failed to
break above 113.50.

Although today's move is a warning signal that debts of western
nations remain a bigger issue than just peripheral Europe, Japan's
debt is held mostly by domestic investors, which should protect it
from a sharp sell-off anytime soon.

Thus, the yen sell-off may also prove to be short-lived.
USDJPY: daily chart. Some formidable resistance levels ahead: 82.95,
then 83.10, 83.25 and 84.30.

*Federal Reserve: No hawks?*
The FOMC statement last night was as expected, except that none of the
new members picked up the baton from hawk Hoenig and there were no
dissenters.
* The Committee confirmed that the economic recovery is continuing
* The improvement in the unemployment rate and core inflation have
been "disappointingly slow."
* The Fed remains committed to QE2 until June this year
* Current economic conditions "are likely to warrant exceptionally
low levels for the federal funds rate for an extended period."
* No one voted against the policy decision after prior hawk Hoenig
left the FOMC at the start of this year.

Depending on the GDP data tomorrow, which is expected to show growth
accelerated to 3.5% annual pace in Q4 last year, we have a dovish
Fed implementing more policy stimulus at the same time as growth has
returned to pre-recessionary levels... we're live in a strange new
world...

But dollar strength might prevail for a little while after markets
were shocked by the downgrade of Japan.
EURUSD (green line) and German-US yield spread. The spread has started
to narrow recently, which could weigh on EURUSD in the short term, and
we could see gains above 1.3700 hard to sustain, until the spread
returns to widening, lending support to another push higher in the
single currency.

*UK: investors are pricing in a nera-term rate hike after January's
meeting showed a more hawkish split in the voting.*
Interest rate futures contracts (short sterling) have fallen (yields
risen) in the aftermath of yesterday's BOE minutes. The chart below
shows the March Short sterling contract. This is currently pricing
yields at 83 basis points, this equates to the markets expecting one
25 bp hike during the next two months. The moving average for the
short sterling yield chart has also turned sharply higher, which
reinforces the trend amoung traders to price in a near-term hike.
March Short sterling contract with moving average (bottom chart -
green line).

This should provide a support for sterling. Although we believe that
1.6000 is pretty formoidable resistance, gains to 1.5940 - the
200-hour moving average- and then 1.5960/70 look possible in the
short-term. But, eventually the spotlight will return to the weak
outlook for UK growth, which could see a sharp re-pricing in interest
rate futures and would weigh heavily on sterling. Good support lies at
1.5775 - the recent low and 100-day moving average.
GBPUSD daily chart: 1.5775 - 1.6010 range for cable for now.
Source: ActionForex.Com

READ MORE - Japan's Downgrade is a Warning Shot

USDJPY – S&P cuts the Japanese rating!

That was speculated for a while, yet still came as a big surprise. The
S&P rating agency cut Japanese sovereign rating from AA to AA-, citing
massive public debt, high deficit and little prospects for improvement
for both. While Japan does finance most of the debt with domestic
savings, large deficits indeed should be perceived as a risk factor.

This decision is severely negative for the yen. It means that this
year the USDJPY not only will be under (moderately) bullish influence
from the US market yields but also will be supported with the Japanese
factors which so far were relatively neutral for the pair.

Technically, the pair should be riding the subwave 3 in a large wave 3
– theoretically very strong upward movement getting it as high as
85,10. Resistances on the way are at 83,50 and 84,40. A break of 83,50
could be treated as a confirmation of this upward structure.

*EURUSD – no surprises*
The FOMC didn't surprise the market presenting a dovish statement.
What was not entirely clear, was if the vote was about to be
unanimous. T.Hoenig was replaced by hawkish C.Plosser and R.Fisher who
could vote against the chairman, but eventually didn't. They still
can do it in March but the unanimous vote confirms there will be no
hurry to change the tone for as long as the labor market doesn't
improve significantly. At that point, we see the Fed rising rates only
in 2012 and its policy being relatively neutral for the dollar in
2011. Thus, major shifts on the EURUSD should come from developments
in Europe (mostly related to the debt crisis).

The pair advanced somewhat after the statement yet the gain was
moderate and the resistance of 1,3750 hasn't been tested yet. The
pair broke the trend line today morning after the news from Japan but
the support at 1,3640 halted a decline. Only when supports at 1,3640
and 1,3540 are broken, one can anticipate a larger sell-off to begin.
Having that said, we don't see a significant upward potential on the
pair in the near term.

*Events to watch – US claims, durables and Microsoft*
US initial claims are the data to watch today. The number of claims
fell to 404k last week from an unexpected jump two weeks ago and the
market expects the number to stay slightly above 400k. A drop below
the 400k threshold would be positive for the dollar, especially given
the momentum after the S&P's decision today. The data will be
released at 8.30 ET (14.30 CET) along with a report on durable orders
(consensus +1,5% m/m for the headline and +0,8% for the core). On the
corporate front, investors await a report from Microsoft (after the
bell, consensus for the EPS is 0,68 USD) and from Nokia, Caterpillar,
Lockheed Martin and Procter&Gamble among others.
Source: Fxstreet.com

READ MORE - USDJPY – S&P cuts the Japanese rating!

Yen slides on S&P downgrade

Ratings-giant Standard & Poor's reassessment of the fiscal health of
Japan was responsible for a slump in the yen on Thursday while an ECB
official sent another hawkish signal helping further vilify a recent
rally for the euro.

*Japanese yen –* The dollar rose by more than one yen as it swooned
in the aftermath of the downgrade. The move from AA to AA- might be a
small move but sends a bigger signal and changes the dynamic of the
relationship between the safe haven pairing. S&P said that the
downgrade was on account of worsening debt ratios, which it says still
won't peak for a further 15 years. Japanese officials responded by
saying that the government was trying to overhaul social security and
reform taxes and defended Prime Minister Kan's policies. Some even
said that they were "misunderstood." By tossing the scale of
Japan's fiscal challenges under the spotlight the S&P move shook
investors' willingness to treat it as a safe haven. On account of
the size of domestic holdings of government paper, the common
perception is that it would be almost impossible to force a run on the
yen. The yen played second fiddle to the dollar this morning as it
rose to ¥83.21.

*Euro –* ECB official Lorenzo Bini Smaghi fanned inflation fears of
earlier this month when he noted that rising import costs can't be
ignored. The euro surged to $1.3756 to an 11-week high in response to
his warning before paring gains. There is a notable difference in tone
between the Fed's aware yet sanguine attitude towards rising
commodity prices and the attitude of the European central bank.

Against the yen the euro rallied more than 1% to ¥113.92.
*U.S. Dollar –* In today's melee the dollar index is unchanged
despite a 1.1% rally against the Japanese unit. The dollar weakened
midweek in response to the unexpressive review from the FOMC at the
end of its two-day meeting. The recovery continues but remains
"insufficient to bring about a significant improvement in labor
market conditions." In conjunction with proposed spending cuts in
Tuesday's Presidential address dealers turned soft on the dollar
until the downgrade of Japanese long-term debt. The Fed's lack of
indication that it was willing to end what it calls its exceptionally
low period for interest rates also seems to be weighing further on the
dollar these days. The FOMC also used the elevated level of
unemployment to justify its $600 billion bond-buying program.

*British pound –* The pound continues of voyage of recovery into the
unknown and on Thursday rose to $1.5970 almost wiping out all of the
losses suffered following news of a sharp contraction in activity at
the end of last year. Investors are split over whether the Bank of
England will be forced to raise interest rates in response to what the
central bank has already called temporary factors. In a speech on
Tuesday the Governor predicted that inflation would return to below
target over the medium term. The euro weakened against the pound to
buy 85.93 pence. The pound was unresponsive to a report showing
further weakness last month in British home prices.

*Aussie dollar –* Prime Minister Julia Gillard said she'd draft in
an income tax worth A$1.8 billion in order to help pay for a clan-up
operation following the Queensland flooding. The announcement weakened
the Australian dollar on two fronts. The move could further crimp
domestic spending at a time when mortgage interest rates have been
rising. Second the tax will be a new factor for the Reserve Bank to
consider when considering whether or not to raise interest rates any
further. The Aussie fell by 0.9% against the greenback to stand at
99.06 U.S. cents but off an earlier session low at 98.75 cents.

*Canadian dollar –* The Canadian dollar is marginally lower but
continues to tag alongside the recovering U.S. unit. On Thursday the
Canadian unit commands $1.0046 U.S. cents.
Source: Fxstreet.com

READ MORE - Yen slides on S&P downgrade

Japan's Debt Downgraded. Should We Care?

The S&P downgraded Japan's sovereign debt one notch and put the
outlook on negative due to the country's debt burden. USDJPY jumped to
attention again after yesterday's sell-off attempt. Is the US next on
the bond ratings agencies' list?

The JPY was sharply weaker today after S&P downgraded Japan's
sovereign debt by a notch. This was after the USDJPY pair played cat
and mouse yesterday with key pivot areas around 82.40. There's hardly
been a reaction at all in Japanese interest rates, with the 2-year
trading about 2 bps higher and CDS prices some 4 points higher
according to a Bloomberg article, so we wonder if the currency market
is overshooting here and if the move could be about nervousness in
this key pivot area in USDJPY. It does help that pair's case to the
upside that US bonds are sharply lower this morning (in all theory,
though, if we are going to talk about sovereign credibility, the US
can't be far in line behind Japan.). But we need a firm sign of panic
in the Japanese debt market or in Japanese CDS prices to see the
sovereign debt story to develop further.

We've talked a long time about Japan's sovereign debt burden and the
apparent impossibility of the country ever digging itself out from
under its debt obligations. Japan has the largest public debt load as
a percentage of its GDP. At the same time, the market has rarely taken
this common knowledge and done anything with it (with Japan more or
less trading on straightforward interest rate spreads, though there
has been a tendency for Japanese CDS prices to creep higher relative
to other major countries) and the bond ratings' agencies have done
little to point out the situation themselves - that is, until last
night.

It's a bit surprising to see the timing of the S&P announcement, which
might have waited for bond yields to head a bit higher first (because
as yields rise, the crushing weight of interest rate payments on the
Japanese budget becomes rapidly hard to sustain. Despite very low
interest rates of the last several years, the country dedicates
something like 25% of its budget to interest rate payments. ) The
announcement will theoretically affect international and possibly even
domestic appetite for Japanese sovereign debt - but we'd prefer to see
the proof in the CDS prices and interest rate spreads - we'll be sure
to track this closely in coming weeks and keep you updated. The S&P
announcement is only worth the bond market's reaction to it. If
Japanese yields start to show more volatility than, for example, their
US counterparts, this would be an interesting follow-up signal. This
ticking time bomb will eventually go off.

*USDJPY*
USDJPY has been playing cat and mouse with support and resistance
levels in a tighter and tighter zone lately. The jump overnight makes
it look like the pair wants to jump higher again, but as we discuss
above, the reaction in FX has been larger than the reaction elsewhere,
so let's see what the JPY and bond markets do over the next day or two
and see if the pair can close north of the 55-day moving average (red
line) again.

*RBNZ*
The RBNZ left its rate unchanged as expected, but its comments on the
economy were generally positive and it kept language about the
eventual need to remove accommodation. This saw quite a boost in the
kiwi, which is much stronger against the hapless Aussie as the AUDNZD
pair moves lower toward its 200-day moving average below 1.2800.
Forward interest rate expectations jumped a few bps in response to the
announcement and NZDUSD pulled back through 0.7700, though we wonder
if it is sustainable above that level. Risk appetite determines the
answer to that question.

*US data*
An extremely lousy US weekly claims report ironically setting up
tomorrow's likely announcement of solid growth for last quarter. The
weekly initial jobless claims number showed us that the seasonal bump
of firings was simply a bit smaller than expected (perhaps because
hirings heading into the holidays were also lousy?) and that we are
back to a grim picture in claims. This is very bad news for the US
economy/confidence. But how does the market take it? If it is taken as
risk negative, we could yet see the USD rally a bit later today. If
this sees the market putting on the QE3 trade... .but wait, remember
the blood pressure... .we won't go there for now, but you get the
idea.

The Durable Goods Orders number looks soft, but the nondefense,
non-aircraft capital goods number was a strong +1.4%, so actually not
that bad there.

*Looking ahead*
With the FOMC ending as a real fizzler in terms of providing new
impetus for market direction (despite having done so on number
occasions in recent months), we now shift our attention to tomorrow's
GDP number from the US as the next possible catalyst for a market
move. Consensus is looking for 3.5% annualized growth.

Meanwhile, European yields head higher and higher as conditions there
get tighter and tigher. Is this a productive way to deal with a
sovereign debt crisis? Tight Trichet is on the prowl, and EUR appears
ready to ride the spike as high as it can go - but it makes little
sense. Perhaps we should watch Brent crude prices as a barometer for
when the market decides to back off the ECB (after all, we are trained
to believe that Trichet will hike even as an economy falls of a cliff
face as was done in the summer of 2008). The US crude prices have been
misleading, after all. The rest of the world is looking at almost
100-dollar crude while US inland prices are at 87 dollars. In Europe
today, the ECB's Nowotny said that the market is getting too worked up
about the prospect for a larger rescue fund. Is anyone out there
listening? Hello?

Be careful out there - these are strange times and I would suspect
that the current low implied volatility levels in FX-land are
extremely misleading.

*Economic Data Highlights*
* Japan Dec. Adjusted Merchandise Trade Balance out at ¥707.3B vs.
¥523.9B expected and vs. ¥536B in Nov.
* UK Jan. Hometrack Housing Survey saw prices fall -0.5% MoM and
-2.2% YoY vs. -1.6% YoY in Dec.
* Sweden Jan. Consumer Confidence out at 23.7 vs. 21.0 expected and
20.8 in Dec.
* Sweden Q4 Manufacturing Confidence out at 12 vs. 5 expected and 5
in Q3
* Sweden Dec. PPI out at +2.2% MoM and +4.3% YoY vs. +0.6%/+2.9%
expected, respectively and vs. +2.2% YoY in Dec.
* Sweden Dec. Unemployment rate rose to 7.4% vs. 7.3% expected and
7.1% in Nov.
* UK Jan. CBI Reported Sales out at 37 vs. 38 expected and 56 in
Dec.
* Germany Jan. Preliminary CPI out at -0.5% MoM and +1.9% YoY vs.
-0.3%/+2.0% expected and vs. +1.7% YoY in Dec.
* US Dec. Chicago Fed National Activity Index out at 0.03 vs. 0.11
expected and -0.4 in Nov.
* US Dec. Durable Goods Orders out at -2.5% MoM and ex
Transportation at +0.5% vs. +1.5%/+0.9% expected, respectively
* US Weekly Initial Jobless Claims out at 454k vs. 405k expected and
vs. 403k last week
* US Weekly Continuing Claims out at 3991k vs. 3873k expected and
3897k last week
*Upcoming Economic Calendar Highlights (all times GMT)*
* US Dec. Pending Home Sales (1500)
* Japan Dec. Jobless Rate (2330)
* Japan Dec. Overall Household Spending (2330)
* Japan Dec. National CPI (2330)
* Japan Dec. Retail Trade (2350)
* UK Jan. GfK Consumer Confidence (0001)
* China MNI Business Condition Survey (0135)
Source: ActionForex.Com

READ MORE - Japan's Debt Downgraded. Should We Care?

Sterling experiences boost further to BoE minutes as Euro continues to hit 2 month highs

!! EUR/USD !!
Today's European session sees the Euro continue its recent run of 2
month highs as it yet again reaches a high of 1.3720 in mid-session.
The rise has been attributed to the perception that interest rates
will rise in the Euro zone prior to the US, in an effort to battle
inflation, further to recent tough talk by European Central Bank
President Jean Claude Trichet. The Euro began the session on a
decline, dropping some 35 pips to reach a day's low of 1.3656 but
quickly recouped those losses and bounced back up some 60 pips as it
moved towards its 61.8% Fibonacci retracement level, at 1.3743, of its
November 4th to January 10th decline. This level is seen as a strong
resistance level which if broken may see the Euro test the November
22nd high of 1.3785. The market is now focused on the upcoming Federal
Interest Rate decision which is expected at 19:15 GMT to come out the
same as its previous value of 0.25%.

!! GBP/USD !!
The Sterling experienced a boost today further to the release of the
minutes from the Bank of England's policy meeting this month which
showed that policymakers considered an interest rate hike and that the
decision of not increasing the rate was closer than previously
anticipated. The British pound gained a momentary burst against the
Dollar of some 40+ pips around 09:30 GMT to 1.5870, following the
minute's release before returning back to levels seen prior to the
release but went on from there to steadily rise and reach a daily high
of 1.5890 and trade for the remainder of the session around the 1.5862
levels. Further to the release of the minutes the odds for an interest
rate hike of 25 basis points occurring in May have once again
increased form a low of 30% - subsequent to the UK GDP announcement of
-0.5% - to 46%.

!! EUR/GBP !!
In early session the Euro began with an inclining motion against the
Sterling reaching a two and a half month high of 0.8671, but
subsequent to the release of the Bank of England minutes the cross
pair dropped by some 40 pips to a low of 0.8620 and has traded
throughout mid-session around the 0.8632 levels. The movement seen was
an inverse reflection of what was seen with the GBPUSD pair, with the
EURGBP dropping momentarily upon the announcement of the minutes
before sustaining levels prior to the announcement and then going on
to relive such low levels within the next hour. The announcement sees
the Sterling turning back towards its 50% Fibonacci retracement level,
at 0.8610, of its October 25th to January 10th drop – a level that
the pair crossed over yesterday following the lower than expected UK
GDP data.

!! USD/CHF !!
The Swiss Franc opened today's European session paring back on
yesterday's gains which saw the USDCHF pair drop some 80+ pips to a
three week low of 0.9402 on the back of worries with regards to the
economy and surprising UK GDP figure. Early session saw the Swissy
paring back some 30 pips to trade around the 0.9452 levels before
experiencing some volatility which saw the Swiss Franc trade around
the 0.9443 level with an oscillatory range of +/- 20 pips.

!! USD/JPY !!
The Japanese Yen moved against recent trend in today's European
session as it dropped some 12 pips against the Dollar to see the
USDJPY pair rise to 82.23 in mid European session. In recent days the
USDJPY pair has been steadily dropping after having reached a peak of
83.07 at the end of last week. Throughout all of today's sessions
the movement within the USDJPY pair appears limited with a range
between the peaks and troughs of not much more than 25 pips.
Source: Fxstreet.com

READ MORE - Sterling experiences boost further to BoE minutes as Euro continues to hit 2 month highs

Japan: BoJ Can Now Afford to Relax

* Bank of Japan (BoJ) as expected did not announce any policy
changes in connection with today's monetary meeting. With the
economy recovering again and currently no severe appreciation
pressure, it will be status quo for the rest of the year. The zero
interest rate policy will be maintained and BoJ is expected to
continue to purchase assets until June/July.

* Unlike most other countries inflation in Japan is still
substantially below the central bank's inflation target and for
that reason there is less pressure to respond to the recent
increase in commodity and energy prices. Interest rate hike not
expected until Q4 2012.

*Details*
As expected BoJ did not announce any policy changes in connection with
today's monetary meeting. The key policy rate, which is the target for
the O/N interest rate on the interbank market, was left unchanged at
0-0.1%. Also in line with expectations, BoJ did not announce any
further expansion of its JPY35trn QE programme. BoJ's QE programme
currently consists of a JPY30trn fixed rate funds supplying operation
and a JPY5trn asset purchase programme. BoJ has so far only utilised
30% of its asset purchase limit. If the current pace of asset
purchases is maintained, BoJ will reach the limit for its asset
purchase programme in June/July, when the Fed is also expected to end
its asset purchases.

BoJ released revised macroeconomic forecasts in connection with
today's meeting. BoJ's GDP forecast for fiscal 2010 (FY 2010) was
revised markedly higher to 3.3% from previously 2.1%. However, this
was solely due to a major upward revision in Japan's GDP data. BoJ's
current forecast for FY 2010 is very close to our own 3.4% forecast,
which assumes a 0.3% q/q contraction in Q4 10 and 0.6% q/q growth in
Q1 11.

Nonetheless, the revised GDP numbers suggest that the output gap in
Japan has closed more than previously assumed. BoJ's forward-looking
view of the economy is broadly unchanged; it believes the recovery is
currently pausing, but expects it to resume. The latest data suggest
that the Japanese economy resumed growing in November.
BoJ's inflation forecast for FY 2010 and FY 2011 was revised
marginally higher to -0.3% (from previously -0.4) and 0.3% (from
previously 0.1%). These minor upward revisions were mainly due to the
impact from higher commodity and energy prices globally.

*Assessment & Outlook*
With growth poised to resume and currently no severe appreciation
pressure on JPY, we expect the rest of the year to be status quo for
BoJ. It will most likely continue to purchase until July, but we do
not expect the asset purchase programme to be expanded further. We
expect the leading interest rate to be left unchanged until at least
Q4 2012. BoJ has signalled that it will maintain its "zero interest
rate policy" until price stability is in sight. BoJ has also indicated
that price stability implies that inflation should be close to 1% (BoJ
board members' "understanding" of price stability) and not just that
consumer prices are out of deflationary territory.

With the output-gap closing somewhat faster than previously expected
due to the revised GDP numbers and the impact from higher commodity
prices, this could be within reach in late 2012. However, unlike in
most other countries, inflation in Japan is still substantially below
target, with headline inflation still negative in Japan.

Hence, unlike the eurozone, the UK and to some degree the US, there
will be less pressure on JPY to respond to the recent sharp increase
in food and energy prices. This is partly reflected in the interest
rate spread. For example, the 2-year interest swap spread to the US
has increased from close to zero in November last year to currently
around 40bp since November. This has contributed to putting a floor
under USD/JPY and should eventually also support a weaker JPY.
Source: ActionForex.Com

READ MORE - Japan: BoJ Can Now Afford to Relax

The Bank of Japan will announce its first decision in 2011 this week

The Asian region awaits a week full of fundamentals along with central
bank decisions, which is expected to affect the performance of
financial markets and investors' outlook expectations. The outlook is
different regarding monetary policies in Asian nations along with
different objectives both in terms of growth support or the fight
against inflation and deflation.

The Bank of Japan (BoJ) stuck with the program of buying corporate
bonds under the government's plans of stimulating financial markets
and supporting companies through facilitating lending to stimulate the
recovery.

The bank held the program at 5 trillion yen (60 billion dollars) under
the stimulus plan of buying corporate bonds, whereas they proceeded in
buying real estate investment securities in order to support real
estate companies to complete their projects through the banks
purchases of bonds in these companies.

The high return on bonds witnessed in Japan recently is undesirable by
policy makers, due the damage to the economy and the pressure on the
companies that will pay that return, and may impede its obligations to
the government that will be prompted to pay dues on the long run.
The Japanese economy will also release this week the unemployment rate
during the month of December which is expected to remain stable at
5.1%, while retail sales are expected to decline by 1.4% during the
same month after 1.9%.

The Reserve Bank of New Zealand (RBNZ) will also announce this week
its interest rates decision where they are expected to be left steady
at 3.00% for the third consecutive meeting. This comes after the bank
said that the monetary tightening will be very limited considering the
outlook for the recovery, especially after the earthquake.

The New Zealand economy contracted by 0.2% during the third quarter of
2010 after the earthquake, which caused damage to much of the
infrastructure that hammered the recovery.

The current focus for the RBNZ is supporting growth which is keeping
the bank from raising rates from 3.00%, especially in light of the
constant inflation rates at appropriate level for the central bank,
which will prolong the period of maintaining interest rates at current
levels.
Source: Fxstreet.com

READ MORE - The Bank of Japan will announce its first decision in 2011 this week

Japan's REITs To Increase Their Property Purchases Next Year By $12 Billion

AS for the Japanese economy's efforts to help the economic recovery to
rebound and support the growth to exist from its hurdle, where Japan's
Real Estate Investment Trusts (REITs) announced today that they are
going to increase their investment and double property purchases
during the next year by 1 trillion yen (12 billion American dollars)
by increasing bond sales amid falling interest rates for three years.

Moreover, Japan's Real Estate Investment Trusts sold 179.5 billion yen
of bonds during last year which was the most since 2007, while this
investment trusts' purchases will break the highest level in four
years, comparing with as much as 600 billion yen current year that
started in April 2010, supported by the Bank's stimulus, where the
Bank's purchasing plan will help them to make this process easier, and
it aims to increase their capital.

On the other hand, the Real Estate Market created in 2001 to be a
financial tool (which is a pools assets into trade-able securities) to
help the economic growth, and to support J-REITs' investments, while
Investment Trusts account about 20% of Japan's 45 trillion yen
securitized real-estate market.

The Governor Mr. Shirakawa and his board leaders, decided to fix the
rates steady at the lowest level between zero and 0.10%. Further,
consumer price index in Japan is continuing to fall, pushing the Bank
of Japan to keep the interest rates between zero and 0.10% at least
for two more years, to fight deflation.

During the last two years land prices in Japan dropped to the lowest
level. Real estate trusts get most of their profit from rental income,
paying the majority of it as dividends. While investors receive a
yield that is competitive with bonds, they can also benefit should the
value of the underlying properties rises.

Investors in J-REITs including units of Mizuho Financial Group Inc.,
Japan's third-largest bank by market value, and Tokio Marine
Holdings Inc., the nation's second-largest casualty insurer, have
already began raising funds to invest in REIT shares. Mizuho Asset
Management Co. set up a 17.7 billion yen fund this month and Tokio
Marine Asset Management Co. started a 21.2 billion yen fund in
November.

Increasing Investment Trusts' investment will lead the stock market to
rise as much as 40% this year.
Japan's tertiary industry index inclined 0.6% in November, following
an incline by 0.5% during the preceding month in October, which was
revised to 0.3%, where the market's expectations estimated of 0.5%
Source: ActionForex.Com

READ MORE - Japan's REITs To Increase Their Property Purchases Next Year By $12 Billion

EUR/USD continued to climb

!! EUR/USD: Continuing To Climb This Morning !!
The Euro continued its rebound this morning, testing resistance around
the 1.3440-level. The Euro has been climbing all week against the US
dollar, with the pair starting the week from a four-month low at
1.2871. The European interest rate remained unchanged yesterday at
1.00% but the ECB did suggest that it could raise interest rates to
battle inflation. The currency has climbed more than 3.5% this week.
Focus remains on key US data starting off with Retail Sales at
1330GMT.

!! GBP/USD: PPI Figures Available At 0930GMT !!
Cable traded at a 4-week high yesterday of 1.5885. The market reacted
positively to the UK leaving interest rates unchanged at 0.5%. The
pair traded slightly lower overnight in Asia, keeping a tight range.
Sterling was trading at 1.530, shortly after the European open
(0820GMT).
There is more important news being released from the UK today, with
PPI figures being released at 0930GMT.

!! USD/JPY: Trading Lower Overnight In Asia !!
Japanese exporters and profit-takers have been responsible for moves
down in JPY pairs. USD/JPY moved down from an early high of 82.82 to
82.44, the overnight low. The yen is trading at 82.43/46 now against
the Dollar, down 0.45% so far today. USD/JPY is back in the Ichimoku
cloud with EUR/JPY holding just shy of the cloud.
Source: Fxstreet.com

READ MORE - EUR/USD continued to climb

Yen hits 1-week high as US Treasuries extend gains

*Asian Market Update:* Yen hits 1-week high as US Treasuries extend
gains; China stocks sinks on hawkish PBoC rhetoric and overheating
lending activity

!! Economic Data !!
*- (JP) JAPAN DEC DOMESTIC CGPI M/M: 0.4% V 0.2%E; Y/Y:* 1.2% V 1.0%E
(highest since Nov 2008)
*- (CH) CHINA CONFERENCE BOARD NOV LEADING ECONOMIC INDEX:* 0.5% V
0.9% PRIOR (4-month low)
*- (KS) SOUTH KOREA DEC EXPORT PRICE INDEX M/M: 3.1% V 1.2% PRIOR;
Y/Y: 4.3% V 1.9% PRIOR; IMPORT PRICE INDEX M/M: 4.7% V 2.1% PRIOR;
Y/Y:* 12.7% V 8.2% PRIOR
*- (SI) SINGAPORE NOV RETAIL SALES M/M: 0.6% V 0.9%E; Y/Y: -2.4% V
-2.4%E; EX AUTO:* 5.4% V 5.8%E

!! Markets Snapshot (as Of 12:00amET) !!
- Nikkei225 -0.6%
- S&P/ASX +0.2%
- Kospi +0.4%
- Taiex -0.1%
- Shanghai Composite -1.0%
- Hang Seng +0.2%
- Mar S&P Futures +0.1% at 1,282
- Mar Gold +0.7% $1,377/oz
- Feb Crude oil -0.3% $91.09/brl
- Mar Copper -0.3% at $4.36

!! FX USD Majors Session Range !!
*- EUR/USD:* 1.3325-1.3365
*- GBP/USD:* 1.5820-1.5850
*- USD/CHF:* 0.9635-0.9655
*- USD/CAD:* 0.9885-0.9905
*- AUD/USD:* 0.9950-0.9995
*- NZD/USD:* 0.7725-0.7695
*- USD/JPY:* 82.55-82.85

!! Overview/Top Headlines !!
- Asian equity markets are trading mixed in the final session of the
week in the wake of another impressive bond auction out of the EU
periphery soured by a 10-week high in weekly jobless claims out of the
US. A second consecutive rise in claims weighed on risk appetite as
traders took some profits ahead of the US CPI and retail sales data.

On the corporate side, uncertainty regarding the financial sector
ahead of the JPMorgan earnings clouded a strong result from tech
heavyweight Intel, where rising CAPEX and higher margins helped shares
gain over 2% afterhours. European and commodity currency majors traded
sideways, consolidating US session gains increasingly perceived as
short-covering. *Likewise, flight to the safety of US treasuries
weighed on benchmark yields, as 10-year's fell below 3.30% afterhours
and USD/JPY hit a 1-week low below ¥82.50.*

- Shanghai Composite is the biggest decliner in the region, as
exporters take note of a third consecutive session of post-reval
record high in Chinese Yuan.* Recall, China Pres Hu is preparing to
meet with US Pres Obama next week, with Treasury Sec Geithner already
chiming in about CNY strengthening being too slow. Additionally,
*hawkish commentary from PBoC Assistant Gov Li Dongrong warning China
is facing rising inflation expectations* raised some speculation the
central bank could tighten policy once again. Finally, a *China Daily
report citing interbank data saw China's top 4 banks lending about
CNY240B in the first 10 months of January v CNY160B for all of
December.* A similar dynamic was on display last January (2010), when
sharply high lending activity spurred the first RRR hike out of 6 for
the remainder of 2010 - PBoC's first policy tightening since 2008.

!! Speakers/Geopolitical/In The Press !!
- (SI) Singapore implements 4th round of property cooling measures
including an increase in stamp duty to a max of 16% v 3% prior
*- US Defense Sec Gates:* China's cyber and anti-satellite advances
may present a challenge to operations of US forces in the Pacific
*- (EU) ECB's Trichet:* Will not allow a long-term rise in inflation;
Expects inflation to fall below 2% by the end of the year; Italy and
Spain should maintain credible fiscal policies - press interview

!! Equities !!
*- Lenovo: Company boosted its market share for the 5th consecutive
quarter to 9.7%; 2010 shipments rose 37.3% y/y to about 34M PCs on
rising enterprise sales and expansion in retail - South China Morning
Post*
*- Woolworths:* Continues to struggle making deliveries to Queensland;
May take weeks to return supplies to normal levels
*- Hyundai Motor:* Expected to sign a deal to acquire Hyundai
Engineering & Construction later today - Korean Press
*- Sony:* To debut 3D camcorders in April with 10x optical zool and
64GB external memory priced around ¥30K - Nikkei News
- (US) According to NPD, 2010 spending on videogames was $15.4-15.6B,
flat to down 1% y/y
*- Sigma Pharma:* Chairman: Expects to have improved financial
position after selling pharma unit to Aspen; Road closures from
flooding has impacted some deliveries
*- INTC: Reports Q4 $0.59 v $0.53e, R$11.46B v $11.4Be; +2.1%
afterhours*
*- CSTR: Reports prelim Q4 $0.65-0.69 v $0.84e, Rev $391M v $425Me
(previously guided Q4 $0.79-0.85, R$415-440M on 10/28); -24.4%
afterhours*
*- SBIB:* Has put itself up for sale; Sale expected to be announced
next week; Expected to go for $8.00/share (closed at $7.48), $825M -
US Financial Press citing sources; +8.3% afterhours

!! FX/Fixed Income/Commodities !!
*- (CH) PBoC sets yuan mid point at 6.5896 v 6.6046 prior close (new
Yuan high since 2005 revaluation)*
*- GLD:* SPDR Gold Trust ETF daily holdings fall by 6.4 tons to
1,265.1 tons (multi-month lows)
- (CH) According to People's Daily, wheat production areas in China's
northern areas of Shandong region are suffering droughts with no rain
for about 4 months
Source: Fxstreet.com

READ MORE - Yen hits 1-week high as US Treasuries extend gains

The Japanese yen remains range bound against the majors

The *US dollar [1]* weakened on the back of better than expected
demand for Portuguese government bonds at today's auction, boosting
euro sentiment. Dollar weakness may be short lived as fears of a
European contagion are still at the forefront of investor's minds.

It is very possible that we may see the return of market fears driving
the euro lower as was evidenced last summer.
The *euro* climbed out from under a recent dearth of mainly dollar
positive data; though gains are expected to be short-lived after the
Portuguese debt sale did little to quell fears that some of the
indebted Eurozone countries will struggle to meet their funding needs
for the year. Attention now turns to Spain and Italy, who will sell
debt tomorrow in auctions that will also be closely watched for any
sign of an expanding debt crisis. Belgium is now also included in the
firing line due to political instability, having been without a
government for the past 7 months. The King is now involved in bringing
an end to the stalemate. Traders still expect the euro to retest its
Monday lows, with a break below likely opening the door to a decline
towards $1.2645 and $1.2590 in the coming weeks.

Also bolstering the euro were comments from Eurozone sources that
finance ministers are likely to consider next week raising the
effective lending capacity of the currency bloc's rescue fund as part
of efforts to calm jittery markets. If finance minister continue to
downplay the debt problems, then it suggests that officials are
getting further behind the curve, which would undermine the currency.

The *British pound* climbed to a one-month high against the dollar as
steady buying from Asian sovereign accounts helped to offset the
impact from data which showed Britain's trade deficit widening to
record levels.

Britain's trade gap widened to 8.736 billion pounds in November from
an upwardly revised 8.591 billion pounds in October. Imports of oil
and aircraft pushed the trade deficit to its biggest since monthly
records began in January 1980, contrasting with expectations for a
modest narrowing.

Today begins the two-day BOE Monetary Policy Committee meeting where
inflation expectations are likely to dominate the discussions though
no rate hike are anticipated until August at the earliest.

The *Japanese yen* remains range bound against the majors.
The *Canadian dollar* extended gains against the USD, rallying to a
fresh 21/2 year highs after breaking a key resistance level, boosted
by a global risk rally and talk of domestic rate hikes. A broadly
softer greenback and greater risk appetite with rising commodities and
equities are supporting the loonie's move higher.
The *Mexican peso* firmed to its strongest levels since October 2008
after solid demand at a Portuguese government debt auction eased
concerns about Europe's debt crisis, boosting riskier assets.
Mounting worries that massive floods in northeast Australia could
hamper growth were taking a toll on the *Australian dollar* driving it
to 1-month lows against the USD.
Source: Fxstreet.com

READ MORE - The Japanese yen remains range bound against the majors

Machine Orders In Japan Unexpectedly Dropped As The Strength Of Yen's Impact

Its seems that the negatively impact of the Yen's appreciation is
continuing to haunt Japanese economic recovery during the New Year,
where the machine orders index in Japan unexpectedly dropped for a
third month in November, indicating that companies still concerned
about the strength of recovery, because of the Japanese companies
intended to reduce their capital spending on expand their investment.

Machine orders in Japan declined 3.0% in December following a decline
by 1.4%, and it came opposing analyst's forecasts of an incline by
2.0%. Machine orders rose to 11.6% during the year ended December from
7.0% a year earlier, while it was expected to increase by 17.4%.
The Yen's gain is still hurt the economic growth in Japan and it is
working to reduce the companies' investment during the year, signaling
that the economy will be in a narrow range during the first half of
2011.

As for a result of a drop in Japan's machine order will increase
concern about the economic recovery in the nation that is slowing, as
the government's stimulus spending fades during the month September.
Orders will likely drop in the second half of the fiscal year ending
March as companies placed them in the fiscal year ending March as
companies placed them in the first half due to concern about an
economic slowdown.

Moreover, some companies in Japan are working to face the yen's
advance and to keep their producing by the next five years, such as
the world's largest automaker (Toyota Motor Corp.) is challenging
itself to produce more even as even retrain its capital spending,
while it aims to keep its annual capital spending at about 700 billion
yen (8.43 American dollars).

On the other hand, Japan's current account surplus narrowed for the
first time in three months in November as the export-dependent economy
retreated by 15% due to the yen's appreciation along with the
decline in global demand that remains below levels witnessed last
year, also the nation import growth has exceeded exports.
The expectations indicated that Japan's gross domestic product will
slow at a 1.9% annualized during the third fourth quarter of 2010
Source: ActionForex.Com

READ MORE - Machine Orders In Japan Unexpectedly Dropped As The Strength Of Yen's Impact

Euro hopes fanned by Commissioner's revamp pep talk

European session pressure on the dollar came to a brisk halt in early
New York trading with the euro, pound and yen each surrendering gains
to the greenback in rapid succession. Investors were encouraged over
the prospects for a Portuguese auction following comments penned by EU
Monetary Affairs Commissioner Ollie Rehn who urged cohorts to soon
consider reinforcing the scope of the Eurozone?s current and emergency
backstops and enhancing the degree of flexibility of the measures.

*U.S. Dollar -* Earlier losses for the dollar have rapidly given way
as investors digest the words of Commissioner Rehn. ?We need to review
all options for the size and scope of our financial backstops,? wrote
Rehn in the Financial Times. But the obstacles to an agreement remain
sizeable not least because the decision to raise the lending ceiling
of the ?440 billion emergency fund would set off a new round of
required parliamentary approval. Given that path would neither be
smooth nor swift, the dollar has overturned an earlier wave of
selling. The dollar index is flat at 80.75.

*Euro -* The euro rallied to its highest since last Thursday in
European trading reaching $1.3045 as French and German officials
praised the efforts of the Portuguese government in taking tough
measures to rein in its public spending and reducing its budget
deficit. French Finance Minister Christine Lagarde told domestic
television that Portugal was making more progress than it had
committed to, urging its leaders to continue since ?structural reforms
are necessary.? German Chancellor Merkel told reporters that Portugal
had taken ?very important measures? and appears to be taking them
seriously. The euro was also inspired by hopes that officials will
next week discuss the effective lending capacity of the Eurozone's
rescue fund. When the EU established the ?440 billion European
Financial Stability Fund in May last year, in order to maintain a
top-notch credit rating the fund was restricted to lending around ?250
billion. Hopes that the EU will discuss enhancing its flexibility
helped soothe worries beyond a request for assistance beyond a nation
the size of Portugal.

Such earlier optimism appears to have done its usual trick and was
enough to drive the shorts out of the market triggering stops as they
hit the exits. The euro has subsequently eased to an unchanged value
of $1.2975.

*Japanese yen -* The yen strengthened in Asia against the dollar
reaching ¥82.98 following a thirteenth straight decline in bank
lending.

Bank of Japan data showed outstanding bank loans fell by 1.9% in
December following a 2.0% decline in November. Bankers face a hard
time finding companies wanting to borrow to fund investments meaning
the central bank will maintain its ultra-low borrowing costs for as
far as the eye can see. The current account surplus in the year
through November also declined according to a separate report making
for the first year-on-year decline in three months. As equity prices
remained elevated around the world for a second day demand for the yen
fell allowing the dollar to turn losses into gains on the day reaching
¥83.32.

*British pound -* The pound fell from its highest in a month following
the largest trade deficit since 1980 when records began. Having
touched $1.5681 ahead of the £8.7 billion shortfall in trade the
pound has fallen back to an unchanged reading of $1.5600. The November
trade report was expected to narrow to £8.3 billion following a
reading of £8.6 billion in October. The pound also gave up small
gains against the euro and trades slightly weaker per euro at 83.22
pence. The Bank of England starts a two-day meeting on Wednesday to
discuss the health of the economy against a backdrop of stubborn
inflation.

*Aussie dollar -* Reserve Bank board member Warwick McKibbin told the
Sydney Morning Herald that he expects growth to be pared by as much as
1% as a result of the floods hitting Queensland. The rising waters are
expected to continue for two more days before levels subside.

Australia?s dollar took another pounding overnight and reached a
one-month low at 98.04 U.S. cents. However, broader appetite for risk
building on strengthening demand for equities around the world on
Tuesday helped the Aussie unit reverse course in midweek trading
lifting it to 99.23 cents in European trading. The local dollar was
also helped by housing data released earlier. As equity prices
gathered steam demand for the Japanese yen also waned allowing the
Aussie to rally to ¥82.33.

*Canadian dollar -* Swollen by growing confidence in the world
recovery and rising commodity prices the Canadian currency today
traded up to $1.0136 the strongest since May 2008. The Canadian unit
is also benefitting at the expense of the Aussie dollar as the
Queensland floods take their toll. The Aussie has shed five cents
recently against its commodity-sensitive counterpart reaching a
four-month low at 97.05 Canadian cents this morning.
Source: Fxstreet.com

READ MORE - Euro hopes fanned by Commissioner's revamp pep talk

Japanese pledge stabilize the Euro for now

*European Market Update:* Peripherals rhetoric and Japanese pledge
stabilize the Euro for now

!! Economic Data !!
*- (FR) Bank of France Business Sentiment:* 108 v 107 prior
*- (CZ) Czech Nov Retail Sales Y/Y:* 5.0% v 2.5%e
*- (TU) Turkey Nov Current Account (TRY):* -5.9B v -5.8Be
*- (SW) Sweden Nov Service Production M/M: 0.2% v 0.5% prior; Y/Y:*
5.8% v 4.5% prior
*- (SW) Sweden Dec Budget Balance (SEK):* -97.7B v 13.7B prior
*- American Banking Assoc (ABA): Q3 Loan Delinquencies Q/Q:* 3.01% v
3.00% prior
*- (GR) Greece Dec Consumer Price Index Y/Y: 5.2% v 4.9% prior; CPI EU
Harmonized:* 5.2% v 4.8% prior
*Fixed income*
*- (NE) Netherlands Debt Agency (DSTA) sold €3.25B vs €2.5-3.5B
Indicated Range in 1% 2014 Bonds; Avg Yield:* 1.297 % v 0.861% prior
- (DE) *Denmark* sold approx DKK5B vs DKK5B indicated in 3% 2021
Bonds; avg yield 3.14%
*- (IT) Italy Debt Agency(Tesoro) sold €7.0B vs. €7B Indicated in
1-year Bills ; Avg Yield: 2.067% v 2.041% prior; Bid-to-cover:* 1.6 x
v 2.0x prior
*- (GR) Greece Debt Agency (PDMA) sold € 1.95Bin 26-week Bills vs.
€1.5B Indicated; Avg Yield: 4.90% v 4.82% prior; Bid-to-cover:* 3.4
x v 5.15 prior
- (EU) ECB allots €180.1B in main 7-day Refi Operation at fixed
1.0%; Rec'd 169 bids
- (HU) Hungary Debt Agency (AKK) sells 45BHUF in 3-Month Bills; Avg
yield 5.71% v 5.72% prior
*- (UK) DMO sold £900M in 1.25% Index-Linked 2032 Gilts; Avg Yield
:0.748 % v 0.710% prior; Bid-to-cover:* 2.0x vs. 1.6x prior

!! SPEAKERS/FIXED INCOME/FX/COMMODITIES/ERRATUM!!
*Notes/Observations:*
*- China Dec Foreign Exchange Reserves:* $2.85T v $2.76Te (record
level)
*- China Dec New Yuan Loans (CNY): 480.7B v 360.0Be v 564.0B prior; M2
Money Supply:* 19.7% v 19.0%e
- Alcoa [AA] kicks off earnings season
- Japan announced support for Euro's ESFS bonds
- Greece Debt Agency gets the job done for now
*Equities:*
FTSE 100 +1% at 6,015, DAX +0.50% at 6890, CAC +0.66% at 3827, IBEX
+0.50% at 9,484, FTSE MIB +0.40% at 20,141, SMI +0.55% at 6481

*- European shares rose after yesterday's losses.* Eurozone debt
concerns continue to weigh on markets as investors are continuously
comparing the events happening in Portugal to what happened in Greece
and Ireland. Once again, the Portuguese Finance Minister reiterated
that the country will do anything to avoid bailout while reserving
some harsh rhetoric for the European Union as he accused the EU of not
doing its job. However, risk appetite returned to the market as Japan
joined China in easing European debt concerns and pledged to buy EU
bonds. The markets were also lifted by Alcoa's earnings which beat
estimates, albeit modestly and gave an optimistic forecast on aluminum
global growth. The best performers were European banks bouncing from
yesterday's losses following an upgrade to Overweight by Societe
Generale. UK banks were leading the rally in the FTSE after a London
Times report noted that domestic banks would not face windfall taxes
or bonus curbs as government will not impose tough regulations on its
banks.

*- Major European retailers reported today. Metro* [MEO.GE] reported
its fourth quarter sales which almost came flat with estimates due to
harsh weather conditions. However the company reiterated its FY10
guidance. *Marks and Spencer* [MKS.UK] was lower by 1.6% following its
trading update. Despite an increase in total group sales and UK
like-for-like sales, company reiterated its bleak outlook of
challenging trading conditions due to spending cuts and increased
commodity prices. German maker of Nivea cream Beiersdorf [BEI.GE] fell
by over 1% after net missed estimates while revenue came in line with
expectations. Company noted that the drop in profit was due to a
writedown related to Chinese unit and plans to scale back its product
lineup. The company had already reported in December that due to
repackaging measures, it was expecting €120M in costs in 2010.

*Speakers:*
*- Finland Fin Min Katainen* commented that Portugal needed to take
decisive political steps to calm international markets. He added that
Ireland might not be the last country to seek financial aid from the
EU and IMF.
*- Portugal Fin Min dos Santos* comments that the country did not need
financial bailout and would do everything possible to avoid such a
scenario. He stressed that Portugal was doing the required work (but
added that Europe as a whole was not). Ahead of Wed pivotal bond
auction the minister expressed a high degree of confidence that it
would encounter 'good demand'. He stated that Portugal continued to
pay relatively low average rates. And would not confirm speculation
whether China had purchased bonds directly
- Spanish press reported that Spain was considering a syndicated debt
sale of up to €6B to banks. However, Spain Treasury official stated
that it had NOT set either an amount nor date for sovereign syndicated
sale. He did add that the Treasury was always in the market for a
potential sovereign syndicate bond deal but no visibility for a sale
in the near future

*- Former PBoC Advisor Fan Gang* commented that he saw continued yuan
currency appreciation and reiterated estimate for China GDP around
8-9% in 2011. Fan Gang noted that there would be no sudden one-off
appreciation in the Chinese currency and that China would be able to
achieve a great deal even with such a gradual approach. He noted that
China must be wary of Eurobond investment risks but bonds backed by
European stability fund was safer than national debt. He added that
the Euro currency was on safe ground, while the USD would weaken

*- Ireland's Debt Agency* (NTMA) Chief Corrigan reiterated that it is
possible the country might return to the markets next year. The
official noted that there were a lot of stresses within the euro zone
and would have to wait for those events to play out before returning
to the market.

*- Poland Central Bank's* Rzonca wrote in the Polish press that the
Zloty was undervalued and thus saw a risk to FX and lending if
interest rate increase was delayed. An undervalued currency presented
inflationary risks and that central banks needed to react early to
inflationary signals. The bankers forecasted stronger Zloty currency
and lower credit supply with an interest rate increase.

*- German HDB Construction Federation* released its 2011 Outlook and
stated that German construction sales expected to decline by 1% y/y.
it noted that German builders were lagging the economic recovery.

*Currencies/Fixed income:*
- The economic calendar was light in the session but debt -related
rhetoric was plentiful (see above speaker section). Dealers continued
to place the euro-area debt problems in focus as sovereign funding
results were the highlight in the session. Dealers noted that the
Asian session high of 1.2990 was used as an opportunity by some to
establish fresh short positions. The EUR/USD stabilized after reports
on Monday that the ECB was again buying peripheral debt. Japan's
pledge to purchase ESFS bonds helped to instill a small degree of
confidence. Dealers are watching the 1.2860 to 1.3070 range as to the
directional move in the pair. The Portuguese bond auction on Wed
should provid greater clarity to the medium term picture.
- the USD/CHF continues to hold below the pivotal 0.9730 area (it
seven-month downtrend line) but dealers are noting that real money
names are selling CHF in the last few session.
- The Queensland floods continued to take its toll on the Aussy with
AUD/USD off a big figure from the Asian open and trading in the lower
half of the 0.98 handle.
- Bund and Gilt futures regained opening losses as safe-haven flows
remained predominant. The 10-year Belgium/German Gov't bond spread was
approaching 140bps and wider by over 5bps in session. The Greek
26-week action sold more than indicated but overall dealers were not
'overly impressed' with the results.

*Geo-Political/ In the Papers:*
- The former Chief Economist of the ECB Issing warned the euro's
existence may be threatened lest European governments impose spending
curbs on each other in the New York Times. By failing to render
individual states' fiscal policies consistent with the conditions for
a single currency area, it has weakened and even threatened the
existence of the euro. He expressed concerns that politics have failed
to take the crisis as an opportunity to strengthen the current
framework.

- According to the Portuguese press, ratings agency Fitch stated that
it will not change Portugal's sovereign rating as a result of reports
that the country was being pressured to seek external assistance.

- The Telegraph reported that the UK services sector presents downside
risks for economic growth. Citing the British Chambers of Commerce,
fourth quarter GDP growth may have slowed to 0.4%-0.5% compared to the
0.7% in the prior third quarter. Note that the services sector makes
up about 75% of the UK's GDP.

- The Telegraph's Ambrose Evans-Pritchard commented on renewed fears
of the European debt crisis. Citing the former IMF official Stephen
Jen, Greece, Ireland and Portugal are insolvent. Bailouts, for the
purpose of saving the euro, are causing the spread of the crisis by
contaminating the stronger states instead of sorting out the balance
sheets. If the size of the bailout is increased to €700 billion, one
of the AAA-rated states, such as France, Germany, may be downgraded.

!! Looking Ahead !!
*- (PE) Peru Nov Trade Balance:* No est v $439.0M prior
*- 6:00 (SA) South Africa Nov Manufacturing Production M/M: 0.7%e v
1.2% prior; Y/Y:* 2.7%e v 2.5% prior
- 6:30 (CL) Chile Central Bank Economist Survey
*- 7:00 (EU) ECB to drain €74.0B in 7-day term deposit tender*
*- 7:30 (US) Dec NFIB Small Business Optimism:* 94.3e v 93.2 prior
- 7:30 (GE) (GE) Germany Chancellor Merkel Briefs Press Briefing
- 7:45 (US) Weekly ICSC Chain Store Sales
*- 8:15 (CA) Canada Dec Housing Starts: 180.0Ke v 188.1K Prior
(revised from 187.2K)*
- 8:30 (US) Fed's Plosser speaks on Economic Outlook
- 8:55 (US) Redbook Weekly Retail Sales
*- 9:00 (MX) Mexico Oct Gross Fixed Investment:* 6.0%e v 6.8% prior
*- 9:00 (MX) Mexico Nov Industrial Production Y/Y:* 3.8%e v 3.7% prior
*- 10:00 (US) Jan IBD/TIPP Economic Optimism:* 46.9e v 45.8 prior
*- 10:00 (US) Nov JOLTs Job Openings:* No est v 3.4K prior
*- 10:00 (US) Nov Wholesale Inventories: 1.0%e v 1.9% prior*
*- 10:15 (MX) Mexico Dec Vehicle Production: No est v 207.6K prior;
Domestic Sales: No est v 75.6K prior; Vehicle Exports:* No est v
168.2K prior
- 11:00 (US) Fed to Purchase $7-9B in Notes/Bonds
- 11:30 (US) Treasury to sell 4-Week Bills and $22B in 52-week Bills
- 13:00 (US) Treasury to sell $32B in 3-Year Notes
- 14:00 (US) Fed's Kocherlakota speaks in Wisconsin
- 16:30 (US) API Weekly Energy Inventories
*- 17:00 (US) ABC Consumer Confidence w/e Jan 9th:* No est v -45 prior
Source: Fxstreet.com

READ MORE - Japanese pledge stabilize the Euro for now

USD was steady against Yen

*Australian Dollar*: The Australian Dollar fell on the release of
yesterdays Trade Balance with the number coming in well below forecast
at A$1,93 billion compared with a previous reading of A$2.56 billion.
The Aussie traded at 0.9930 before the announcement and fell almost 20
points on the release as the trade surplus narrowed almost A$70
billion with exports flat for the period and imports up almost 3%. As
the local session continued so did the AUD sell off with the AUD
hitting a low of 0.9818 in the Asian session before settling into an
offshore range of 0.9823 to 0.9884. Concerns about the continued
flooding in Queensland and its effects to local growth in 2011 will
continue to weigh on the AUD over the next several days.

* We expect a range today of 0.9800 to 0.9900
*New Zealand Dollar*: * *An improved reading in both the NZIER
Business Confidence Index (actual 8; previous 6) and Building Consents
(actual 8.8%; previous -1.8%) had minimal impact on the Kiwi during
Asian trade when released with the NZ Dollar limited to a 20 pip range
against the Greenback. The market now expects the Reserve Bank of New
Zealand will start to lift interest rates around April 2011. During
the offshore session the dollar moved between 0.7560 and 0.7617. There
is no significant data schedule for release out of New Zealand this
week so the currency will be at the mercy of offshore events and
happenings.

* We expect a range today of 0.7550 to 0.7650
*Great British Pound*: The Pound rallied in Asian trade against the
Greenback moving slowly and steadily towards the 1.56 handle as
traders opted to purchase the Pound ahead of its US counterpart. Out
yesterday was the BRC Retails Sales Monitor index (measures change in
same store sales at retail level) which indicated that the British
consumer is being fairly cautious when it comes to retail spend. The
result came in at -0.3% compared with a previous reading of 0.7% with
many market analyst believing that the run of recent bad weather in
the UK is to blame. Against its Southern Hemisphere counterparts the
Pound is changing hands at 1.5790 against the Aussie and 2.0500
against the Kiwi.

* We expect a range today of 1.5550 to 1.5750
*Majors*: European Sovereign Debt issues out of Portugal and Span
continue to be the dominate topic for traders at the moment, with the
majority of top tier data being ignored in favour of the happenings
within the 16 nation currency. Helping the EURO to hold above the 1.29
mark against the Greenback was news that Japan would buy Euro area
bonds in an attempt to help improve the regions debt crisis. The EURO
reached an intraday high of 1.2992 against the US Dollar [1] but
concern over the uptake of Portuguese, Spanish and Italian bond sales
scheduled for tomorrow and Friday has the market still on edge. The US
Dollar is steady against the Yen (83.20) and down against the Pound
(1.5593).

*Data releases*
* *AUD*: Trade Balance; ANZ Job Advertisements
* *NZD*: No data slated for release
* *JPY*: Bank Lending y/y; Current Account
* *GBP*: Nationwide Consumer Confidence/BRC Shop Price Index
* *EUR*: French Govt Budget Balance; Italian Industrial Production
m/m
* *USD*: Beige Book, Federal Budget Balance; Import Prices m/m
Source: Fxstreet.com

READ MORE - USD was steady against Yen

Japan Offers to Help Europe

After the crash and bang of last week's market as everyone tried to
position themselves for the upcoming market and prices moved multiple
percent in a day yesterday seemed a tad soporific with prices
remaining very much range bound.

The focus was still on the Eurozone and the insurance cost against
default of some of its weaker members with Belgium, Greece and
Portugal's continuing to rise. The euro has managed a slight show of
strength after Japan pledged overnight to invest in euro area bonds in
order to bulk up the European Financial Stability Fund. This is
exactly what China promised to do last week and although it may
provide a few hours of respite for the single currency this is no
panacea.

Yields have also been on the increase and we get our first euro debt
auction of the week, in this case, from Italy. While Italian yields
have risen in recent months it has not been too pernicious however we
will be looking to see whether we are seeing further contagion into
stronger economies. Portugal and Spain step up tomorrow.

The pound has enjoyed a corking start to the new year but yesterday
was pushed back by its old nemesis; the housing market. The Halifax
building society reported that house prices fell in the month of
December by 1.3% vs. a 0.4% expectation. Things are looking very poor
in the housing market and this will continue to act like a weight
around the pound's neck.

Once again the market is expected to be quiet today with the data
calendar light although the powder keg of Europe may explode at
anytime.

!! Latest Exchange Rates At Time Of Writing !!
Rates are dependent on amount transacted.
Source: Fxstreet.com

READ MORE - Japan Offers to Help Europe

U.S. Forex Market Commentary

Euro
The euro appreciated vis-�-vis the U.S. dollar today as the single currency tested offers around the US$ 1.3435 level and was supported around the $1.3325 level. The common currency reached its highest level since 14 December as European and North American dealers pushed the pair higher to interweek highs. Some dealers chased the common currency higher after it was reported that EMU-16 December flash consumer price inflation came in stronger-than-expected at +2.2%, up from the prior reading of +1.9%. This represents the first time the inflation rate has exceeded the ECB�s target of just below 2.0% since October 2008 and the rise was largely attributable to higher energy and food prices. German data saw December unemployment up 3,000, the first increase in seventeen months, with the unemployment rate steady at 7.5%. Also, French December consumer confidence fell to -36 from the revised prior reading of -33. After failing to fully sterilize about ?73.5 billion in EMU-16 peripheral bonds last week, the ECB succeeded today as liquidity and confidence surged. Spanish Prime Minister Zapatero reported Spanish financial institutions face a new round of stress tests "immediately.? In U.S. news, data to be released today saw November factory orders reverse course and climb +0.7%, up from the revised prior reading of -0.7%. Traders await the release of Federal Open Market Committee meeting minutes later during the North American session. The major data release in the U.S. this week include December non-farm payrolls data that will be released on Friday. Many forecasts are predicting jobs growth of 140,000 with the unemployment rate expected around 9.7%. Federal Reserve Chairman Bernanke will testify on Friday. The Federal Reserve may face a stormy 2011. Representative Ron Paul, who advocates the end of the Fed, will chair the House of Representatives subcommittee that oversees the Fed while the House Oversight Committee will be chaired by Republican Darrell Issa who has called for increasing the Fed�s transparency. Additionally, the regional Fed Bank Presidents who rotated in as voters in 2011 are said to be more hawkish than their other regional counterparts who will not be voting on the Federal Open Market Committee this year. Traders will ponder whether the US$ 600 billion monetary expansion announced by the Federal Reserve in early November will suffice and whether the Fed�s purchase of U.S. Treasury securities will keep a sufficient lid on market interest rates. Euro bids are cited around the US$ 1.3235 level.

Yen / Yuan
The yen depreciated vis-�-vis the U.S. dollar today as the greenback tested offers around the �82.25 level and was supported around the �81.60 level. Technically, today�s intraday high was right around the 38.2% retracement of the �84.50 � 80.25 range. Japanese financial markets reopened overnight after the New Year holiday. The dominant theme at the beginning of 2011 will be whether or not Bank of Japan will expand monetary policy further to counter the yen�s strength. A move below the psychologically-important �80 figure will likely be met with major jawboning and verbal intervention from officials along with possibly more yen-selling intervention. BoJ Deputy Governor Nishimura will visit the U.S. from tomorrow and traders will pay close attention to any remarks he makes. December monetary base data will be released tonight but there will not be any other major data released this week. The government last week reported it did not conduct official yen-selling intervention in December for a third consecutive month following its �2.12 trillion intervention actions in September. Data released in Japan last week saw December manufacturing PMI climb to 48.3 from the prior reading of 47.3. Finance Minister Noda last week verbally intervened against the yen�s strength again, vowing to take "bold action when moves are excessive.? Noda added the yen�s appreciation has been "one-sided? while Economy Minister Kaieda added "abrupt yen moves must be avoided.? The Nikkei 225 stock index climbed 1.65% to close at �10,398.10. U.S. dollar offers are cited around the �84.60 level. The euro moved higher vis-�-vis the yen as the single currency tested offers around the �110.25 level and was supported around the �108.90 level. The British pound moved higher vis-�-vis the yen as sterling tested offers around the �128.60 level while the Swiss franc moved lower vis-�-vis the yen and tested bids around the �86.70 level. In Chinese news, the U.S. dollar appreciated vis-�-vis the Chinese yuan today as the greenback closed at CNY 6.6100 in the over-the-counter market, up from CNY 6.6070. Data to be released tonight include December HSBC services PMI. China�s seven-day repo rate fell 2.03% to 4.31% today, the largest decline since October 2007. People�s Bank of China Governor Zhou reported the Chinese economy likely expanded around 10% in 2010. Zhou reported "External conditions made an important impact on our (economic) recovery, so we have not fully grasped whether the economy is already back to normal.? Zhou also reiterated policymakers need to execute a "prudent? monetary policy. China is said to be targeting 8% GDP growth and 4% inflation growth in 2011 along with 16% M2 money supply growth.

Pound
The British pound appreciated vis-�-vis the U.S. dollar today as cable tested offers around the US$ 1.5645 level and was supported around the US$ 1.5455 level.
Technically, today�s intraday high was just above the 50% retracement of the $1.5910 - 1.5350 range. Many data were released in the U.K. today. First, December manufacturing PMI improved to 58.3 from the revised prior reading of 57.5. Second, November net consumer credit fell -�100 million. Third, November net lending secured on dwellings climbed �800 million. Fourth, November mortgage approvals were up 48,000 from the revised prior total of 47,300. Fifth, the November M3 money supply was off 0.8% m/m and off 1.4% y/y. The dominant themes in the U.K. this year will be the ongoing consolidation of fiscal spending and how Bank of England will react to significantly-elevated rates of inflation far above its inflation target. Bank of England Monetary Policy Committee Sentence last week reported official interest rates should "gradually? be raised to signal the U.K. economy is returning to "normal? and contend with inflation that may accelerate to double the BoE�s target in 2011. Sentance also reported the British economy "has bounced back from recession more strongly than most people were expecting. Cable bids are cited around the US$ 1.5265 level. The euro depreciated vis-�-vis the British pound as the single currency tested bids around the �0.8560 level and was capped around the �0.8635 level.

Franc
The Swiss franc depreciated vis-�-vis the U.S. dollar today as the greenback tested offers around the CHF 0.9475 level and was supported around the CHF 0.9325 level. Technically, today�s intraday high was just below the 50% retracement of the CHF 0.9665 � 0.9300 range. The Swiss media this week reported Swiss National Bank is expected to register a fourth quarter loss of CHF 11 billion on its currency reserve holdings. Data released in Switzerland this week saw the December purchasing managers index decline to 59.6 from the prior reading of 61.8. The dominant theme in Switzerland in 2011 will be whether or not Swiss National Bank restarts its franc-selling intervention operations, or even has the war chest do so to prevent exporters� margins from eroding. SNB incurred approximately CHF 22 billion of intervention-related losses in the first nine months of 2010 on account of its inability to halt the franc�s appreciation. Swiss National Bank Chairman Hildebrand has labeled the franc�s record rally a "burden.? U.S. dollar offers are cited around the CHF 0.9780 level. The euro appreciated vis-�-vis the Swiss franc as the single currency tested offers around the CHF 1.2680 level while the British pound moved higher vis-�-vis the Swiss franc and tested offers around the CHF 1.4790 level.
Source: Fxstreet.com

READ MORE - U.S. Forex Market Commentary

U.S. Forex Market Commentary: Australasian dealers pushed the common currency lower overnight on a report the European Central Bank

EURO

The euro depreciated vis-à-vis the U.S. dollar today as the single currency tested bids around the US$ 1.3125 level and was capped around the $1.3185 level. Technically, today’s intraday low was right around the 38.2% retracement of the $1.5140 – 1.1875 range. Australasian dealers pushed the common currency lower overnight on a report the European Central Bank has “serious concerns” about proposed Irish legislation regarding the country’s banking system. There is speculation the new law, if passed, would inhibit the ECB’s ability to execute its liquidity operations. The common currency was also pressured lower on a report that troubled Irish banking giant Allied Irish Banks may be nationalized. Traders also pushed the common currency lower in anticipation of U.S. economic data that are due to be released this week will evidence a U.S. economy that is expanding more-than-expected. Q3 gross domestic product data will be released on Wednesday and many economists expect the preliminary +2.5% y/y estimate will be upwardly-revised. Liquidity will likely be lighter-than-normal this week on account of the Christmas holiday. Data to be released during the North American session today include the November Chicago Fed national activity index. In eurozone news, Eurogroup chairman Juncker this weekend reported the European Union “in January will have to tackle the question whether the funds that have been gathered to tackle the overall consequences of the crisis in case other countries will get in such a situation – which I don’t see happening but which I can’t exclude either – need to be increased.” Juncker also reported the euro “isn’t in a crisis” and is “astonishingly stable…We’re facing a debt crisis in individual euro area countries. The euro’s existence isn’t at risk.” ECB President Trichet said the euro’s dissolution is an “absurd hypothesis.” Ongoing eurozone sovereign credit jitters are also weighing heavily on the common currency. Data released in the eurozone today saw the October EMU-16 current account improve to -€2.3 billion from the revised prior reading of -€8.5 billion. Data to be released later during the North American session include December EMU-16 consumer confidence. Also, German November producer prices moderated to +0.2% m/m and +4.4% y/y. German data to be released tomorrow include the January GfK consumer confidence survey. Euro bids are cited around the US$ 1.3075 level.


YEN

The yen appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the ¥83.75 level and was capped around the ¥84.10 level. Technically, today’s intraday low was right around the 38.2% retracement of the ¥85.95 – 80.25 range. Bank of Japan’s Policy Board began its two-day monetary policy deliberations overnight and is largely expected to keep policy unchanged. Many dealers believe the central bank will keep policy unchanged for the foreseeable future unless the yen resumes its move higher. BoJ Governor Shirakawa speaks tomorrow after the Policy Board’s decision is announced. The government, however, is expected to maintain pressure on the central bank to ease policy further. The central bank is also expected to keep its economic assessment unchanged when its policy decision is released overnight. Data released in Japan overnight saw the October coincident index tick higher to 100.8 while the October leading index improved to 97.7. Other data saw November nationwide department store sales reverse course and decline 0.5% y/y and November Tokyo-area department store sales weakened to +0.3% y/y while November convenience store sales improved to +1.1% y/y. Other data to be released this week include November merchandise trade. BoJ’s monthly economic report will also be released on Wednesday. Bank of Japan last week reported Japanese companies accumulated a record amount of cash on their balance sheets last quarter, consistent with this week’s BoJ quarterly Tankan survey that showed a decline in business confidence among large manufacturers. Traders continue to monitor developments on the Korean peninsula where military tensions remain significantly elevated and North Korea is indicating war if possible if South Korea engages in military drills. The Nikkei 225 stock index lost 0.85% to close at ¥10,216.41. U.S. dollar offers are cited around the ¥84.60 level. The euro moved lower vis-à-vis the yen as the single currency tested bids around the ¥110.15 level and was capped around the ¥110.70 level. The British pound moved higher vis-à-vis the yen as sterling tested offers around the ¥130.45 level while the Swiss franc moved higher vis-à-vis the yen and tested offers around the ¥86.80 level. In Chinese news, the U.S. dollar appreciated vis-à-vis the Chinese yuan today as the greenback closed at CNY 6.6725 in the over-the-counter market, up from CNY 6.6640. Speculation mounted that Chinese interest rates will not be raised before the end of the year. Government researched Ba Shusong was quoted as saying that banks’ reserve requirements and central bank bill sales may be more efficient tools for controlling inflation than interest rate policy because higher rates may attract capital inflows. Reserve requirements have been raised six times this year. People’s Bank of China Governor Zhou last week reported global economic turbulence is limiting the central bank’s ability to raise interest rates to counter inflation. Notably, China’s inflation rate reached a 28-month high in November and PBoC has pledged it will transition to a “prudent” monetary policy stance in 2011. The central bank this month raised reserve requirements for banks for the third time in five weeks. The lack of an interest rate increase suggests there may be a lack of consensus at the central bank. China is said to be targeting 8% GDP growth and 4% inflation growth in 2011 along with 16% M2 money supply growth.



POUND

The British pound appreciated vis-à-vis the U.S. dollar today as cable tested bids around the US$ 1.5565 level and was capped around the US$ 1.5475 level. Technically, today’s intraday high was just above the 23.6% retracement of the $1.5910 – 1.5455 range. Data to be released in the U.K. tonight include the December GfK consumer confidence survey and data to be released to be released tomorrow include November public sector net borrowing and the November public sector net cash requirement. Minutes from Bank of England’s December Monetary Policy Committee meeting will be released on Wednesday and are expected to evidence intense debate regarding a possible shift in monetary policy. The Confederation of British Industry this weekend reported the central bank will likely begin to start raising interest rates within six months to reduce inflation. BoE released its semi-annual Financial Stability Report last week in which it warned the U.K. is only “partially insulated” from the European financial crisis. MPC member Posen last week reported policymakers should not “overreact” to inflation while BoE Deputy Governor Bean last week warned “elevated inflation” may persist in the U.K. economy. Cable bids are cited around the US$ 1.5265 level. The euro depreciated vis-à-vis the British pound as the single currency tested bids around the £0.8455 level and was capped around the £0.8495 level.



FRANC

The Swiss franc appreciated vis-à-vis the U.S. dollar today as the greenback tested bids around the CHF 0.9650 level and was capped around the CHF 0.9720 level. Technically, today’s intraday low was right around the 23.6% retracement of the CHF 1.0275 – 0.9460 range. Last week, the dollar failed to gain much headway above the CHF 0.9835 level, representing the 38.2% retracement of the CHF 0.9460 – 1.0065 level. Swiss National Bank member Jordan this weekend reported “There may be situations where interest rates have to be kept at a low level to ensure price stability, and where higher rates could threaten the economy.” SNB Chairman Hildebrand reported he remains concerned over the eurozone sovereign debt crisis, adding it could lead to “devastating” consequences if the euro depreciates sharply and the franc soars. Data to be released tomorrow include the November trade balance and November M3 money supply. The KOF Institute last week raised its Swiss GDP growth forecast slightly for 2011 and reported Swiss National Bank is likely to raise interest rates around the middle of 2011. Swiss National Bank’s quarterly interest rate announcement was announced last week in which policymakers maintained the central bank’s three-month Swiss franc Libor target rate at 0.25%. SNB’s 2011 inflation forecast was raised to 0.4% from 0.3% and its 2012 inflation forecast was reduced to 1% from the prior reading of 1.2%. SNB expects the Swiss economy to grow about 2.5% in 2010 and around 1.5% in 2011. The Swiss government last week raised its GDP growth forecast for 2011 to 1.5% from the 1.2% projection it noted in September. U.S. dollar offers are cited around the CHF 1.0180 level. The euro depreciated vis-à-vis the Swiss franc as the single currency tested bids around the CHF 1.2710 level while the British pound moved lower vis-à-vis the Swiss franc and tested bids around the CHF 1.5000 figure.
http://www.gcitrading.com/

READ MORE - U.S. Forex Market Commentary: Australasian dealers pushed the common currency lower overnight on a report the European Central Bank

The AUD rallied against most of its major counterparts

USD - The FOMC holds its last policy meeting of the year tomorrow. No interest rate or asset purchase changes are anticipated but markets will be closely watching the tone of the post meeting statement to see how the central bank views the impact of its latest round of quantitative easing, particular in light of the very recent rise in US Treasury yields. After last week's lack of US data releases, this week has a full slate. Tomorrow, headline retail sales for November are expected to surprise on the upside, as in particular gasoline sales have gone up, driven by higher oil prices. That said the details of the report should be soft, with retail sales ex autos rising a modest 0.1% much lower than consensus expectations. On Wednesday, core CPI is expected to remain modest, increasing 0.1 % m/m. In addition, the first figures for manufacturing confidence in the form of local business surveys from New York and Philadelphia Fed are due. A considerable rebound in empire manufacturing from -11.1 to 4.8 is anticipated. On the other hand, the Philly figures may fall back somewhat, after last month’s massive gain. Data for the housing market is expected to remain weak, but a slight increase in both housing starts and building permits is projected.
The same goes for the NAHB index where a one point increase is anticipated.

EUR - EUR is up today recovering in the European trading session from some mild downside pressures during Asian trading. There is no real Eurozone data out today, leaving EUR at the mercy of the ebb and flow of the USD. EUR speculative futures positioning from the Chicago Futures and Trading Commission showed the net short EUR position pushing further into negative territory as longs exited the market. In the near term, support for EURUSD has come in through the 1.3165 to 1.3180 range during the past four sessions, though the topside has seen pressure as intraday highs have displayed a propensity to generally register at lower levels over the past few sessions. Until the downside support range breaks, or the topside constriction is challenged, EURUSD seems to be range bound.

GBP - The Bank of England's Monetary Policy Committee kept rates steady and left the stimulus plan at 200 billion pounds. PPI input came in at 0.9% (exp 0.5%) while PPI output came in at only 0.3%. While this is a negative sign, sterling has shaken the news off and is trading at recent highs against the greenback.
A test of 1.6000 should surface this week and there will be strong resistance there. This week brings CPI and retail sales, and strong numbers here will certainly that level.

JPY - With the 2 year yield spread between the US and Japanese government bonds persisting at its highest level in months, driven by the sharp rebound in US yields, USDJPY has been urged higher and came close to besting the late November high in the pair near 84.41. The rapid move in US yields and the concurrent co-movement in USDJPY has caused the correlation between rates and the currency pair to rebound from two month lows, denoting the upside pressure on USDJPY that is likely to continue should the US short term rates dynamic persist.

CAD - As expected, the Bank of Canada left rates unchanged at last week's policy meeting. Capacity utilization rose for the fifth consecutive month, helping the strength of the loonie. We continue to see tighter and tighter tighter-day trading ranges – suggesting one of two things: the market is in holiday mode or that the market is having trouble getting excited about the CAD. Our guess is the latter, as .9980 has held three times recently and it appears more unlikely we will push through parity. This week is light on economic releases so look for another week of narrow trading ranges.

MXN - The Mexican peso strengthened against the greenback this morning as manufacturing and exports continued to support the recovery momentum of Mexico's economy. At the headline level, manufacturing IEEM rose to 54.0 from market estimate of 53.7, while non-manufacturing IEEM gained to 53.5 vs. the 53.1 forecasted. New orders jumped to their highest levels in 4 months (56.7), while employment hit its highest reading in the entire year (54.0).

AUD - The AUD rallied against most of its major counterparts as stocks and commodities gained after China refrained from raising interest rates. The currency rose after the rate move predicted by market participants failed to occur even as China's inflation accelerated to the fastest pace in 28 months. China is Australia's largest trading partner and investors speculated an increase in interest rates would damp exports to the nation. As a result the AUD is trading just under par with its US counterpart at 0.9940.

Last Week's Currency Highs and Lows and Forecast

Currency	Highs and Lows Last Week	Forecast
EUR	1.3442 – 1.3165	1.3600 – 1.3184
JPY	84.35 – 82.34	84.46 – 82.82
GBP	1.5871 – 1.5656	1.6092 – 1.5641
CHF	0.9916 – 0.9660	0.9790 – 0.9577
AUD	0.9965 – 0.9753	0.9990 – 0.9729
CAD	1.0141 – 1.0012	1.0147 – 0.9934
DKK	5.6626 – 5.5518	5.5992 – 5.4301
NZD	0.7671 – 0.7435	0.7625 – 0.7471
MXN	12.5334 – 12.3216	12.5417 – 12.1964
SGD	1.3193 – 1.3012	1.3210 – 1.2900
TWD	30.376 – 30.034	30.475 – 29.586
ZAR	6.9891 – 6.8226	6.9326 – 6.6873

U.S. Economic Indicators

Date	Indicators	Previous	Expected
12/15	FOMC Rate Decision (December 14)	1.8	3.9
12/15	Producer Price Index (November)	0.40%	0.60%
	Advanced Retail Sales (November)	1.20%	0.60%
12/15	Existing Home Sales (October)	0.90%	1.00%
12/16	Mortgage Applications (December 10)	-0.90%
	Industrial Producation (November)	0.00%	0.30%
12/16	Initial Jobless Claims (December 11)	421K	425K
12/17	Housing Starts (November)	519K	550K
	Leading Indicators (November)	0.50%	1.10%

http://www.unionbank.com/

READ MORE - The AUD rallied against most of its major counterparts