Asian Market Update

NZ reports trade surplus; Yen continues to strengthen

Economic Data

(NZ) NEW ZEALAND DEC TRADE BALANCE (NZ$): +338M V -50ME (1st surplus in 5-months)
(JP) JAPAN DEC RETAIL TRADE M/M: 0.3% V 0.4%E; Y/Y: 2.5% V 2.1%E (16-month high); LARGE RETAILERS' SALES Y/Y: % V -0.6%E
(JP) JAPAN DEC NATIONAL CPI Y/Y: -0.2% V -0.2%E; CORE Y/Y: -0.1% V -0.1%E; JAPAN JAN TOKYO CPI Y/Y: -0.3% V -0.4%E; CORE Y/Y: -0.4% V -0.3%E
(KR) SOUTH KOREA JAN CONSUMER CONFIDENCE: 98 V 99 PRIOR
(KS) SOUTH KOREA FEB BUSINESS SURVEY - MANUFACTURING: 81 V 79 PRIOR; NON-MANUFACTURING: 79 V 79 PRIOR
(SG) SINGAPORE Q4 URA PRIVATE HOME PRICES Q/Q: +0.2% V 1.3% PRIOR
(JP) JAPAN BOJ DEC 20-21 BOARD MEETING MINUTES
(TH) THAILAND DEC INDUSTRIAL PRODUCTION Y/Y: -25.8% V -28.0%E

Markets Snapshot (as of 05:30GMT)

Nikkei225 -0.3%
S&P/ASX +0.4%
Kospi +0.1%
Taiwan Taiex closed
Singapore Straits Times -0.1%
Shanghai Composite closed
Hang Seng -0.1%
S&P Futures -0.3% at 1,312
Feb Gold -0.5% at $1,718/oz
March Crude +0.1% at $99.77

Overview/Top Headlines

Markets were mixed and cautious in the final trading day of the week, US jobless benefit claims rose last week while durable goods beat estimates in December. Markets are also waiting for the release of Q4 GDP from the US. A drop in USD/JPY tested ¥76.90; yen crosses sold into the Tokyo fix but regained back towards US session levels. This strength weighed on exporting names and could trigger repatriation. Japan PM Noda tried to verbally deter the strength calling for "bold" action to stem the yen rise.

Commodities futures were all lower, silver and copper both falling 0.7%, wheat lost 1% while corn shed $2.20. Shares of NEC fell over 7.5% after reporting after the close on Thursday, NEC also said it would have to lay off 10,000 positions and forecasting its 4th consecutive yearly loss. Some attention was returned to the situation in Greece, it was again reported that the sides were close to an agreement but no new details were released. Euro was weaker through most of the session as was the Swissie.

RBNZ Gov Bollard talking after the December trade balance numbers said that the latest rate decision assumes a delay in Christchurch rebuild with a pick up in 2013; Market does not expect rate increase for a year. In the Q&A went on to say there is a 2012 GDP target of 2-3%; Growth expectations have not changed much.

Bank of Japan in their December 20-21st meeting minutes were mostly in agreement that the broader part of the EU economy remains sluggish, including Germany. One sees merit of high yen for domestic demand oriented firms in Japan. Some thought, the latest expansion of asset buying has been effective and there was a need to continue corp bond buying even though there was under subscription.

Speakers/Geopolitical/In the press

(KR) South Korea Govt and Bank of Korea (BoK): Need to redouble efforts to enter new markets as demand from Southeast Asia, China and developed countries for the country's exports is expected to fall
(JP) Japan Fin Min Azumi: MoF staff looking at the trade deficit number to determine if it is temporary
(ID) Indonesia Central Bank Gov: Sees Jan CPI 0.6-0.7% m/m and 3.5% y/y; Sees 2012 CPI at 5.2-5.5% y/y if fuel subsidies are imposed
USD/MYR: (MY) Former Malaysia PM Mahathir Mohammad said the world's biggest economies could return to a Bretton Woods-style currency system due to quantitative easing measures by major central banks - US financial press

Equities

Samsung Electronics, 005930.KR: Reports Q4 Net KRW4.0T, Op Profit KRW5.3T v KRW5.2Te, Rev KRW47.3T v KRW47Te
WPL.AU: Started taking indicative bids for a large fraction of its 50% stake in the Browse gas project; Could exceed A$1.0B for the stake - The Australian
DCM: Reports 9-month Net ¥395B v ¥443.9B y/y, Op Profit ¥743.8B v ¥758.5B y/y; Rev ¥3.17T v ¥3.2T y/y
HMC: Reports 2011 global vehicles sales -20.2% y/y to 2.9M units
TM: Reports 2011 global production -9.1% y/y to 6.9M units
NSANY: Reports 2011 global output +14.3% y/y to 4.6M
Kia Motors, 000270.KR: Reports FY11 Net profit KRW3.5T v KRW2.3T y/y; Op profit KRW3.5T v KRW1.7T y/y; Rev KRW43.2T v KRW23.3T y/y
LPL: Reports FY11 Net loss KRW991B v loss KRW842Be; Op loss KRW1.25T v loss KRW910Me; Rev KRW23.5T v KRW24Te

US Equities

SBUX: Reports Q1 $0.50 v $0.49e, R$3.44B v $3.3Be; Raises FY12 $1.78-1.82 v $1.83e, Affirms Rev +10%; Q1 non gaap op margin 16.2% v 17.0% y/y; margin contraction was due to higher commodity costs; -2.1% afterhours
JNPR: Reports Q4 $0.28 v $0.28e, R$1.12B v $1.1Be; Guides Q1 $0.11-0.14 v $0.26e, R$960-990B v $1.1Be; -8.1% afterhours
RVBD: Reports Q4 $0.25 v $0.24e, R$204M v $201Me; Guides Q1 $0.19-0.20 v $0.25e, R$183-187M v $197Me - conf call; -13.8% afterhours
RHI: Reports Q4 $0.30 v $0.31e, R$973M v $986Me; -3.9% afterhours
DV: Reports Q2 $0.85 (ex items) v $1.00e, R$524M v $536Me; -8.7% afterhours
AMGN: Reports Q4 $1.21 v $1.22e, R$3.97B v $3.9Be; +1.0% afterhours
KLAC: Reports Q2 $0.72 v $0.66e, R $642M v $631Me; Guides Q3 $1.00-1.18 v $0.82e, R$770-830M v $684Me; +3.7% afterhours

FX/Fixed Income/Commodities

PKX: Considering lowering the capacity of planned mill in India from 13M ton/year to 8M ton/year
GLD: SPDR Gold Trust ETF daily holdings rise by 1.5 tons to 1,261.1 tons (highest since 1,267.9 on Dec 21st)

Profit Taking Halts Rally

U.S. Dollar Trading (USD) stocks rallied in Europe but some weak US housing data prompting a reversal in the New York session on profit taking across the markets. December New Home Sales fell -2.2% vs. a 2.3% forecast. The weekly jobless claims came in near forecasts at 377k vs. 370k expected. In US stocks, DJIA -22 points closing at 12734, S&P -7 points closing at 1318 and NASDAQ -13 points closing at 2805. Looking ahead, Q4 GDP forecast at 3% vs. 1.8% previously. January Consumer Sentiment forecast at 74.1 vs. 74 previously.

The Euro (EUR) the EUR/USD moved to the 1.3180 resistance level in Europe overnight buoyed higher by reports of some progress in the Greece debt deal negotiations and the large rally in US stocks the post FOMC meeting. Profit taking hit during the US session and the major retreated back to 1.3100 support. Looking ahead, ECB President Draghi speaks.

The Japanese Yen (JPY) the USD/JPY continued to retreat in the risk off environment overnight with Y77.50 support giving way and the major sliding to Y77.30. EUR/JPY topped out above Y102 before falling back under Y101.50. AUD/JPY performed well in Europe with the market moving to Y82.75 highs before finding support at Y82 in Asia this morning. UPDATE January CPI at -0.4% vs. -0.3%.

The Sterling (GBP) Cable enjoyed new highs above 1.5700 but came under pressure after weaker than expected December CBI Retail Sales data showed a slump to -22 vs. +6 in previously. The weakness in the consumer outlook is making the UK recovery outlook more uncertain going forward. EUR/GBP rallied to month highs on the weak data but reversed with the EUR/USD back to 0.8350 support.

Australian Dollar (AUD) the AUD/USD made an attempt at the 1.0700 key resistance before reversing back to lower 1.0600 region in the US session. The Asia session was very quiet with the Chinese markets still away on New Year holidays and the Australian market closed for Australia Day celebrations. Support is seen at 1.0580 previous resistance.

Oil & Gold (XAU) Gold dipped towards $1700 before rallying to $1730 fresh highs in the US session. Oil broke above $100 but a sharp rally to $101 was reversed back below $100 by the end of the trading session.

Daily Financial Market Outlook

Equity markets were mixed yesterday after the FOMC's unexpected dovish statement – notably that the Federal funds rate is likely to remain unchanged at least through to late 2014, versus the previous guidance of stability in interest rates at least until mid-2013. Although European stocks were up, in most cases by more than 1%. US market performance was flatter. Meanwhile, sterling, as well as emerging market currencies, appreciated against general USD weakness.

Today attention remains on the US with the release of the first estimate of Q4 GDP. There has been a noticeable improvement in US economic indicators in the final quarter of 2011. This has been broad-based, with activity, consumer and business sentiment and labour market data general ly printing stronger than expectations. And notwithstanding this week's softer house sales data, the housing market has also improved. Reflecting this, annualised Q4 GDP growth is predicted to be slightly above 3% in the final quarter of 2011, up from 1.8% in Q3 and the fastest since Q2 2010.

However, a key upward contribution in Q4 will come from a rebound in inventories. This is unlikely to be repeated in H1 2012, indicating a slower pace of expansion ahead. Nevertheless, we have raised our forecast for US 2012 GDP growth to 2.6%, from 2.2% previously. We believe the main downside risk to the outlook comes from an intensification of tensions in the euro area which could damage returning consumer and business confidence. A stronger-than-expected rebound in business and residential investment is the chief upside risk, reflecting potentially strong pent up demand.

Stronger US GDP growth forecast for Q4 2011
 

 

The Japanese Consumer Prices Fell For The Third Month

The Japanese consumer prices index fell for the third consecutive month, where the nation's exports weakened as a result for the ongoing yen's appreciation that contributed in interrupting the nation's economic rebound from March's earthquake.

As, the Japanese national annualized CPI for December rose to -0.2%, compared with the prior reading of 0.5%, yet it came in line with expectations of -0.2.

Also, the Japanese annual CPI excluding food and energy for December remained unchanged at -1.1%, as it came in line with both of the prior and expectation reading of -1.1%.

On the other hand, the Japanese annualized CPI excluding fresh food for December rose to -0.1%, compared with the prior reading of -0.2%, yet it came in line with expectations of -0.1.

Additionally, sales of winter clothing and cars helped the Japanese retail sales to rebound, as it rose 2.5% in December from a year earlier of 2.3%, the climb was greater than expectations of 2.1%.

Moreover, the unceasing yen's appreciation along with slowdown in global growth are weakening the nation's exports, eroding corporate profits and making it more difficult for the world's third-largest economy to recover from the deflation.

Earlier this week the Bank of Japan governor Masaaki Shirakawa and his policy-board members lowered their economic forecast for 2012 to 2% from October's estimates of 2.2%, also the BoJ maintained its projection for consumer prices to rise 0.1%.

On the other hand, the Bank of Japan kept its asset-buying fund at 20 trillion yen ($260 billion), and its credit-lending program at 35 trillion yen to sustain the companies' growth, yet it expects that the economy will recover slowly, along with keeping the benchmark interest rate in line with forecasts, where the BoJ held it in a range of zero to 0.10%.

Moving to the nation's currency, as the USD/JPY pair is showing a huge fluctuation directly after the release of the CPI figures, where it's currently trading around the level of 76.34, after it recorded its highest price at 77.48 and lowest price at 77.25.

Forex Exchange Morning Report

Market wrap

Sentiment was mixed, a London-session rally reversed in NY. Apart from the positive residual effects of the earlier dovish FOMC result, there was a story from Greek newspaper Ethnos that private sector bondholders had revised their debt-swap offer from a coupon above 4.0% to a more palatable 3.75%. Also helping was a good Italian bond auction and strong German consumer confidence. Sentiment turned lower in NY after some weak data for new home sales and leading indicators. The S&P500 shed 0.8% after making a six-month high at the NY open to be currently down 0.2%. The CRB commodities index is 0.5% higher, oil +1.3% and copper +1.9%. Global funding pressures continued to wane, US 3mth Libor extending a glacial drift lower since 5 January and down 0.3bp to 0.553%. US 10yr treasury yields slipped from 1.98% in London to 1.93% in NY. The Italian 10yr yield fell 18bp but Portugal's remained under pressure (+20bp) and made a fresh high.

The US dollar index slipped in London and then consolidated. EUR rose in London from 1.3100 to 1.3184 but slipped to 1.3140 in NY. USD/JPY fell from 77.70 to 77.29. AUD rose from 1.0600 to 1.0688 - a fresh three-month high - and then fell to 1.0630. NZD rose from 0.8167 to 0.8236 - also a three-month high - and then fell to 0.8200. AUD/NZD traced a sideways range of 1.2950-1.2990.

Economic wrap

US Chicago Fed national activity index rose to 0.17 in Dec compared to a fall of 0.46 in Nov (downwardly revised from -0.37). The rise in the index was mainly driven by production (+0.24) and employment-related (+0.22) indicators. Consumption and housing indicators were down by 0.29. The sale, orders and inventory category was up 0.01 in Dec.

Orders for US durable goods were positive for the third month in a row up 3% in Dec compared to an upwardly revised increase of 4.3% in Nov. The rise in Dec was, as in Nov, led by nondefense aircraft orders which were up 18.9%. Excluding transport, orders rose 2.1% in Dec compared to an increase of only 0.5% in Nov.

US initial jobless claims rose to 377K the week ending 21st Jan from an upwardly revised 356K. Claims have been volatile in recent weeks due to holidays but smoothing via the four-week moving average shows a continued modest improvement from 380k to 377.5K.

US leading index rose 0.3% in Dec, following a 0.2% rise in Nov (revised from 0.5%). The increase of the index was mostly led by the spread between short- and long-term interest rates, improvement in claims and gains in the factory workweek.

US new home sales were down by 2.2% in Dec after a rise of 2.3% in Nov (upwardly revised from 1.6%). The absolute sales fell for the first time in four months. The fall combined with the 3.5% decline in pending home sales may suggest early signs that the recent stability in the housing market may be faltering.

German consumer confidence rose to 5.9 in Feb from an upwardly revised 5.7 in Jan according to the GfK survey. This fifth consecutive increase and 10-month high was driven by a two-decade low unemployment rate and an improvement in consumer spending despite the ongoing travails of the wider Eurozone. The increase confirms the improvements in other German leading indicators such as the IFO yesterday and the PMI's/ZEW previously.

French consumer confidence rose slightly in Jan to 81 from a low of 80 and still hovering close to a three-year low. Business confidence fell to -12 in Jan, the third consecutive fall since the 10-year high of 28 in Apr 2011.

UK CBI retail sales were down to -22 in Jan from +9. Expected sales were -10, implying a further decline in consumer spending next month. After the negative GDP figure yesterday and another tick higher in the ILO unemployment, the case for further QE at next month's MPC meeting continues to build.

Market outlook

AUD/USD and NZD/USD outlook next 24 hours: The Australian data calendar is empty but NZ has the trade balance, government accounts, and RBNZ Governor Bollard's speech to watch for. AUD's upward trend remains intact, the next upside target 1.0750 (27 Oct high). NZD's upward also remains intact, resistance nearby at 0.8243 and an overbought condition developing possible early warnings the rally may be ripe.

Euro Softer As There Is No News Out Of Athens

Sentiment deteriorated as Greek debt talks continued with no new developments to announce and after softer U.S. labor and housing data. The IIF left markets with little information to digest other than that 'some progress' was made in Athens today and that talks will resume tomorrow. The dollar started the session significantly lower and managed to regain some of its losses as traders took profit ahead of key technical levels. Despite a late day rebound, the US dollar remained softer against most of the majors. EUR/USD stalled ahead of the daily ichimoku cloud base and 38.2% Fibonacci retracement level (of the decline from Oct. highs to Jan. lows) which comes in above the 1.32 figure. The pair saw session highs of nearly 1.3180/85 before correcting lower to current levels of around 1.31.

Economic data released this morning came in mixed with a disappointing rise in weekly initial claims to 377K from the prior 356K (cons. 370K). December leading indicators came in lower than expected at 0.4% (cons. 0.7% prior 0.2%) and new home sales in December unexpectedly fell by -2.2% to 307K from the previous 314K (cons. 321K). Positive data included better than expected durable goods orders which increase 3.0% (cons. 2.0%) and the Chicago Fed national activity index which was surprised with a positive reading in December of +0.17 from the prior -0.46 (cons. -0.12).

U.S. equities reversed earlier gains as sentiment declined with the DJIA falling to close the day lower by around -0.18% while the S&P 500 finished the session to the downside by -0.57%. Commodities continued to outperform on the back of a weaker dollar with gold, silver and oil currently higher by +0.55%, +0.61% and +0.37% respectively. WTI crude spent most of the session above the 100 level but has since declined below the daily Tenkan line to current levels of around 99.80. UST yields remained under pressure after yesterday's FOMC meeting and 10-year yields shed about 5.8bps to around 1.936% at time of writing.
Due out shortly are New Zealand trade balance figures which are expected to show a narrowing deficit to -50M in Dec. from the prior -308M with exports expected to climb to 4.11B from 3.91B while imports are forecast to decline to about 4.10B from the previous 4.22B. The kiwi (NZD/USD) has continued its ascent and approached October highs of just below the 0.8250 level. The trade balance figures will be watched closely as RBNZ Governor Bollard noted yesterday that currency appreciation is reducing exporter returns. Also due out of the Asia/Pacific session are Japan's national (Dec.) and Tokyo (Jan.) CPI figures and retail trade numbers for December. The Bank of Japan also publishes the minutes of its Dec. 20-21 board meeting.

Asia Session: European Finance Ministers Spoil The Euro's Party

Greece was the focus of talks in Brussels, where EU finance ministers voiced their concerns about an offer made by private sector holders of Greek debt. Luxemburg's PM Junker offered the most down-cast assessment, when he stated that Greece's program is off track, also saying that coupon's on bonds maturing before 2020 should be well below 3.5% and below 4% over the full 30 year period.

Currently, the IIF is proposing an average coupon rate of 4%, which they say is the least they can accept if they are to write-down the nominal value of their debt by 50%. However, they will have to accept a lower coupon rate if they want to receive the next round of austerity measures before Athens has to re-finance a large bond on March 20, which if not met would constitute a default by Greece and could be catastrophic for risk assets globally.

Furthermore, Dutch Finance Minister Jager stated that the current plan presented by the bond holders, represented by the IIF, would cause Greece's debt to remain above targeted levels. A key concession for any austerity package is a debt reduction plan that brings Greece's debt to GDP to a more sustainable level, which is deemed to be 120% or below in 2020 and involves a debt reduction of around EUR 100 billion.

Eurozone finance ministers also discussed tighter fiscal controls for European nations and steps to finalise the ESM. It is now confirmed that the rescue fund will be brought forward to July, and the Financial Times reported that Germany has done a black-flip on beefing up the Eurozone rescue funds, stating that they would support a plan allowing the EFSF and ESM to operate conjointly if new fiscal reforms were part of the plan, but the reports were denied by one of her spokesmen.

The BOJ released their growth forecasts for 2012 /2013, which were largely unchanged at 2.0% for FY2012 and 1.6% for FY2013 (previous forecasts were 2.2% and 1.5% respectively). At the same time, the bank stressed that the European debt crisis is holding back global growth, this is clearly not surprising but it does highlight how nervous policy makers are in Asia when it come to the situation in Europe. Earlier, IMF Chief Lagarde urged the 17 Eurozone countries to deal with the crisis that is threatening to drag the world in a 1930's style depression.

Following the meeting the Brussels, risk assets and the euro managed to avoid immediate sell-offs. However, as the situation sunk in, the euro shot below 1.3000 and AUD/USD was pushed below 1.0500. So, it looks like the short-term future of risk assets will remain interlinked with the ability of Greece to secure its next austerity package. Whilst price action doesn't look like a Greek default has been priced in, traders are concerned about the slow progress of Greece and the IIF in developing a plan that will allow Athens to remain above the water line.

Ahead in Europe, we have the release of French, German and Eurezone PMI figures at 19:00, 19:30 and 20:00 AEST respectively.

Euro Breaks Back Above 1.3000 On Positive Greece News

U.S. Dollar Trading (USD) news that Greece had reached an agreement with bond holders helped stoke a further recovery in the EUR/USD and kept the USD under pressure through the European and US session. Stocks did little however with the recent rally running out of steam. In US stocks, DJIA -11 points closing at 12708, S&P +1 points closing at 1316 and NASDAQ -2 points closing at 2784. Looking ahead, Little US data but traders are focusing on the FED’s FOMC meeting Wednesday and any possibility of a change in monetary policy.

The Euro (EUR) the EUR/USD broke above 1.3000 as the short squeeze continued until finding resistance at 1.3050. The positive Greece news has been somewhat hampered in the Asia session Tuesday as comments from some EU officials they are not happy with the terms the private creditors have asked for. Looking ahead, January Manufacturing PMI forecast at 47.4 vs. 46.9. Services PMI forecast at 49.1 vs. 48.8 previously. Also, November Industrial Orders forecast at -2.1% vs. 1.8% previously.

The Japanese Yen (JPY) the USD/JPY was very contained around the Y77 level with action kept to the crosses with EUR/JPY breaking above Y100 and AUD/JPY Y81. The outlook for more Yen weakness is very possible if stocks continue to rally and EUR/JPY holds above Y100. UPDATE BOJ hold at 0.1% as widely expected.

The Sterling (GBP) Cable move to 1.5600 but failed to break above with EUR/GBP buying capping the Cable gains. The outlook is bullish short term but as always we looking to development in the Eurozone for sentiment. Some are looking for the BOE to increase the Asset purchase program at February’s interest rate meeting. Looking ahead, December Public Sector Debt forecast at 12.4bn vs. 15.2bn previously.

Australian Dollar (AUD) the AUD/USD extended the uptrend above 1.0500 and pushing to resistance near 1.0560 before easing on profit taking. The outlook is very strong for the Aussie which is only 5 cents off all-time highs in the middle of a debt crisis. Improving Chinese or US data should support going forward. Looking ahead, Q4 CPI on Wednesday forecast at 0.2% vs. 0.6% previously.

Oil & Gold (XAU) Gold also moved high breaking above $1670 with the Euro led weak USD. Oil Rebounded to test $100 with improving risk appetite supporting.

Greek PSI Offer Rejected, But Deadline Extended To February

O/N BULLETS

• Eurozone finance ministers reject Greek PSI offer – deadline set for February 13
• EZ finance ministers agree on text of ESM treaty
• Posen says MPC right to consider more QE

USD

While the catalyst for USD weakness yesterday may have been growing optimism about the Greek PSI deal, the most notable FX development was USD weakness rather than EUR strength. We suspect this is mainly a result of positioning and USD sensitivity to risk positive developments. The Eurozone developments are likely to remain the main focus today, but will continue to determine USD direction in the way they impinge on risk appetite. The USD could still have significant downside on risk positive news (see spotlight below), but there seems little chance of major progress today.

EUR 

In spite of initial concerns about the Greek PSI deal yesterday, EUR weakness was initially quite modest, suggesting that even though the outcome isn’t ideal the worst of EUR weakness may have been seen for the short run as long as there are no major surprises. Nevertheless, the failure to agree suggests downside risks today. The PMI data this morning seem likely to underpin the talk of stabilisation heard from Draghi and euro area finance ministers of late, even though the data from Spain and comments on German growth yesterday underlined the likely weakness of Q4 growth.

GBP 

UK PSNB numbers will be a focus this morning, and the risks may be slightly towards a smaller deficit than expected judging by recent trends. This may limit the upside scope for EUR/GBP on any positive EUR developments, and resistance at 0.8380 seems likely to hold in the absence of surprising EUR positive news. GBP/USD may be more attractive than EUR/USD if risk positive conditions persist.

CAD, NOK

So far the EU decision to impose sanctions on Iran has had limited impact on the oil price, in large part because they will not be introduced until July 1. But the combination of this, the Saudi revision of their oil price target to $100 p/b and the more positive risk tone suggest there is little downside to the oil price in the short run. While correlation has been very limited of late, the prospect of a firmer oil price may provide some relative support for the NOK and CAD going forward, given that they have underperformed other risk positive currencies of late.

Spotlight – EUR/USD has substantial upside risks on position squaring – The EUR has rallied over the last week as short positioning has been steadily reduced, but the potential for EUR gains on position squaring should not be underestimated. The chart below suggests that a full squaring of EUR short positions could easily lead to a rise to 1.40 or above in EUR/USD. Of course, such a squaring of positions is far from certain to happen given continuing concerns about euro zone debt issues, but from a bigger picture perspective there is no significant difference in yield attraction between the USD and EUR and EUR/USD is close to longer term fair value near 1.30, so there is no major reason to be holding USD over euros in more normal circumstances

 

Asian Market Update

Greek PSI offer rejected, Japan fiscal and economic outlook cloudy, IMF to Aussie banks - raise your capital

Economic Data

 

(JP) BANK OF JAPAN (BOJ) LEAVES TARGET RATE RANGE UNCHANGED BETWEEN 0.0% TO 0.10% AS EXPECTED; LOWERS GDP FORECASTS AND ECONOMIC ASSESSMENT (3rd consecutive cut)
North America Semi Equipment Industry DEC Sales book to bill ratio: 0.88 v 0.83 (3rd consecutive monthly increase)
(AU) AUSTRALIA NOV CONFERENCE BOARD LEADING INDEX: -0.3% V 0.5% PRIOR (5-month low)
(IN) INDIA CENTRAL BANK (RBI) CUTS CASH RESERVE RATIO (CRR) BY 50BPS to 5.50% (not expected); LEAVES REPO RATE UNCHANGED AT 8.50%, AS EXPECTED

Markets Snapshot (as of 05:30GMT)

Nikkei225 +0.2%
S&P/ASX unchanged
Kospi closed
Taiwan Taiex closed
Singapore Straits Times Index closed
Shanghai Composite closed
Hang Seng closed
S&P Futures -0.3 at 1,307
Feb Gold -0.2% at $1,674/oz
March Crude +0.2% at $99.81

Overview/Top Headlines

For the second consecutive day only Australia and Japan were open due to the New Year's celebrations, equities markets were decidedly more positive today with hopes that a resolution may be reached for Greece. EU's Juncker said that the PSI must achieve 120% debt to GDP target in 2020 and that the Greek program is off track, action needs to be taken before there is a new program. Ministers rejected an offer out of the PSI, made from the private bondholders on how to restructure Greek debt, ministers said to be pushing the group to agree to receive less than 4% on the restructured debt.

EU Fin Mins also talked about stronger budget rules for EU members and got a few steps closer on finalizing the structure for the permanent EU bailout fund. France Fin Min Baroin said that there was good progress made on the ESM treaty, expects it to be signed Jan 30th. Agreement said to say the ESM can make loans without unanimous govt backing and will only require support of 85% of eurozone governments.
EUR/USD came off its 3 week high, staying mostly unchanged for the Asian session. AUD/USD lost 30 pips to $1.0493. The other major currencies were little changed. Brent crude held around $110.60 as Iran sanctions are agreed upon around the globe including the EU. US Treasury yields helped to push Japan's 10-yr JGB yield to 1%, the highest level since mid-Dec.

As expected the Bank of Japan left its target rate unchanged. It cut its economic assessment for the 3rd consecutive time, saying "economic activity has been more or less flat, mainly due to effects of slowdown in overseas economy and appreciation of JPY." The BoJ as promised, also updated GDP forecasts cutting FY11/12 to -0.4% from +0.3% and FY12/13 to +2% from +2.2% and raising FY13/14. CPI forecast for FY11/12 was cut to -0.1% from 0.0% prior, other years were confirmed. Also, Japan Cabinet Office guides FY15 primary deficit of 3.6% of GDP; Will miss budget surplus in FY20 even with 10% sales tax, deficit will be 3.1% of GDP. This puts Japan's sovereign rating in danger of a downgrade, outlook is already negative.
Even though the IMF report on Australia is not expected until June, the IMF has instructed Australia's biggest banks to increase their capital. IMF said that the banks may not be able to withstand dual shock of residential property downturn and losses on corporate lending. The IMF noted the main vulnerabilities of the Australian banking sector was their exposure to highly indebted households through residential mortgage lending, together with their large levels of short-term offshore borrowing.

Speakers/Geopolitical/In the press

(JP) Japan Econ Min Furukawa: Declining trade surplus in Japan confirms that domestic industry is being hollowed out; Japan to face further trade deficit if JPY remains strong - Nikkei News
(CN) China Central Bank (PBoC) Gov Zhou: Chinese companies need to rely less on S&P, Fitch and Moody's for credit assessments and do more of their own due diligence - China Newsweek
(AU) Australia Manufacturing Min Carr rejects suggestions that car subsidies should be wound back, calling the industry a foundation stone ton Australia manufacturing - The Australian
(PT) US Financial press comments that a growing number of analysts, economists and politicians worry that Portugal will need a second bailout in 2013 when it has €9B in debt coming due

Equities

LYC.AU: Announces new cornerstone investor; Raising $225M through convertible bond issuance
9501.JP: Nippon Life Insurance Co., Dai-ichi Life Insurance Co, and two other insurers may offer TEPCO ¥100B in syndicated loans as early as April - Nikkei News
NCM.AU: Reports Q2 gold output 579K vs 587.3K q/q, -20% y/y; Copper 18.2K tons vs 19.2K q/q

US Equities

VMW: Reports Q4 $0.62 v $0.60e, R$1.06B v $1.0Be; Guides initial FY12 Rev $4.48-4.6B v $4.5Be; +4.7% afterhours
TXN: Reports Q4 $0.25 (incl $0.23 in charges) v $0.39e, R$3.42B v $3.3Be; CFO: Saw a resumption of demand across a broad range of products in the quarter; +3.6% afterhours
STM: Reports Q4 -$0.01 v -$0.03e, R$2.19B v $2.2Be; Guides Q1 Rev -10% to -4% q/q (implies $1.97-2.10B v $2.1Be); +1.9% afterhours
WDC: Reports Q2 $1.51(adj) v $0.71e, R$1.99B v $1.8Be; Guides Q3 $1.15-1.45 (ex items) v $0.91e, R$2.0-2.15B v $2.0Be; +5.2% afterhours
PLCM: Reports Q4 $0.41 v $0.29e, R$407.0M v $401Me; +14.0% afterhours
CSX: Reports Q4 $0.43 v $0.44e, R$2.95B v $3.0Be; -3.0% afterhours
CR: Reports Q4 $0.88 v $0.90e, R$632M v $650Me; Guides initial FY12 $3.75-3.95 v $3.86e, Rev +5-6% (implies $2.67-2.70B v $2.7Be); -0.2% afterhours

FX/Fixed Income/Commodities

(CN) China Ministry of Commerce (MOFCOM): Domestic pork prices +3.0% in Jan 11th-20th period - financial press
FCG.NZ: New Zealand Commerce Commission announces plans for annual monitoring of milk prices in New Zealand - Dominion Post
GLD: SPDR Gold Trust ETF daily holdings fall by 5.2 tons to 1,250.5 tons (lowest since 1,245.1 on Nov 11th)

Asia Session: European Finance Ministers Spoil The Euro's Party

Greece was the focus of talks in Brussels, where EU finance ministers voiced their concerns about an offer made by private sector holders of Greek debt. Luxemburg's PM Junker offered the most down-cast assessment, when he stated that Greece's program is off track, also saying that coupon's on bonds maturing before 2020 should be well below 3.5% and below 4% over the full 30 year period.

Currently, the IIF is proposing an average coupon rate of 4%, which they say is the least they can accept if they are to write-down the nominal value of their debt by 50%. However, they will have to accept a lower coupon rate if they want to receive the next round of austerity measures before Athens has to re-finance a large bond on March 20, which if not met would constitute a default by Greece and could be catastrophic for risk assets globally.

Furthermore, Dutch Finance Minister Jager stated that the current plan presented by the bond holders, represented by the IIF, would cause Greece's debt to remain above targeted levels. A key concession for any austerity package is a debt reduction plan that brings Greece's debt to GDP to a more sustainable level, which is deemed to be 120% or below in 2020 and involves a debt reduction of around EUR 100 billion.

Eurozone finance ministers also discussed tighter fiscal controls for European nations and steps to finalise the ESM. It is now confirmed that the rescue fund will be brought forward to July, and the Financial Times reported that Germany has done a black-flip on beefing up the Eurozone rescue funds, stating that they would support a plan allowing the EFSF and ESM to operate conjointly if new fiscal reforms were part of the plan, but the reports were denied by one of her spokesmen.

The BOJ released their growth forecasts for 2012 /2013, which were largely unchanged at 2.0% for FY2012 and 1.6% for FY2013 (previous forecasts were 2.2% and 1.5% respectively). At the same time, the bank stressed that the European debt crisis is holding back global growth, this is clearly not surprising but it does highlight how nervous policy makers are in Asia when it come to the situation in Europe. Earlier, IMF Chief Lagarde urged the 17 Eurozone countries to deal with the crisis that is threatening to drag the world in a 1930's style depression.

Following the meeting the Brussels, risk assets and the euro managed to avoid immediate sell-offs. However, as the situation sunk in, the euro shot below 1.3000 and AUD/USD was pushed below 1.0500. So, it looks like the short-term future of risk assets will remain interlinked with the ability of Greece to secure its next austerity package. Whilst price action doesn't look like a Greek default has been priced in, traders are concerned about the slow progress of Greece and the IIF in developing a plan that will allow Athens to remain above the water line.

Ahead in Europe, we have the release of French, German and Eurezone PMI figures at 19:00, 19:30 and 20:00 AEST respectively.

Daily Financial Market Outlook

Discussions over tackling the euro area's debt crisis are expected to remain firmly on the table when EU finance ministers meet in Brussels this morning. Today's gathering comes hot on the heels of yesterday's euro area finance ministers meeting and looks to provide some clarity over the Greek bailout package ahead of next week's EU leaders summit. In terms of economic news, with expectations that euro area GDP contracted in Q4, market focus is now on economic activity in Q1 and the prospect of a euro area wide recession. Although, we look for both the 'flash' manufacturing and services PMIs to have improved in January to 47.5 (prev 46.9) and 49.2 (prev 48.8) respectively - they are expected to remain below 50.

The impact of the slowdown in Europe and its effect on the domestic economy is yet to have a visible impact on the UK public finances. In December, we forecast PSNBX to total £14.4bn. The underlying deficit is thus likely to narrow by £1.5bn on the previous year, broadly in line with the average improvement seen this financial year. This suggests the finances may undershoot the revised official PSNB target of £127bn - no mean feat against a background of weakening economic activity. This reflects a marked slowing in central government spending growth, which has slowed to around 1% on the year. The deficit improvement will provide ongoing support to gilts 'safe-haven' status. However, a fresh recession is likely to result in disappointing receipts growth as we move into 2012-13. Ahead of tomorrow's MPC minutes, Governor King will speak in Brighton this evening.

Improvement in PSNBX in 2011-12 (yoy)

 

The Bank Of Japan Cut Its Growth Outlook For 2012

Bank of Japan (BOJ) cuts its growth outlook for the year starting in next April, along with keeping its zero-interest rate policy as the European sovereign debt crisis reduced the global demand, which also keeps the yen strong.

As, the BoJ's Governor Masaaki Shirakawa and his policy-board members lowered their economic forecast for 2012 to 2% from October's estimate of 2.2%, also the BoJ maintained its projection for consumer prices to rise 0.1%.

The BOJ concerns are growing amid that the European debt crisis that will slow exports and keep the yen near a record high and its ongoing appreciation along with cutting into corporate profits.

The BoJ's Governor said that the European situation is considered the biggest danger because it's threatening the global economy and dragging it into a slowdown, as speculations indicated that the BoJ's governor may not take further easing steps until the turmoil is resolved.

Key Week For GBP With BOE Minutes & 4Q GDP

This week will be a key one for GBP as we have 2 very important fundamental risk events – the Bank of England meeting minutes as well as the advanced version of 4th quarter GDP.

BOE Minutes To Be Parsed for Clues Around Further QE
The Bank of England meeting minutes will be crucial to determine the expectation for the BOE in its subsequent meeting in February and March.

The asset purchase program which was expanded by £75 billion in October to £275 billion is expected to be completed in early February. Therefore investors are keenly watching to see if there any hints about a possible further round of QE to be announced at these next two meetings.

With the economy struggling and prospects of the euro zone sovereign debt crisis deteriorating the market had for the most part priced in further QE from the BOE coming into the beginning of the year. But, with the ECB's recent actions including the LTRO helping to stem the slide in the sovereign debt crisis into a financial banking crisis the BOE may be thinking about limiting its aggressive loosening of monetary policy via its QE program in order to assess incoming economic data.

The economic situation is not necessarily improved as the unemployment rate continues to rise and there's expectation that economy contracted in the 4th quarter – which we address below.

If the bank offers a strong endorsement of further quantitative easing that would pressure the pound against key rivals – as it dilutes the currency – and in fact we've already seen the pound weaker against the euro and higher yielders like the Australian dollar to start the week.

Here's a look at the relative scale of the key central bank's balance sheets since 2008:

4th Quarter GDP Expected to Be Grim Reading

The UK economy has been very uneven over the last year and is expected to show a contraction of 0.1% quarterly terms for the 4th quarter. This would follow a 0.6% q/q increase in the 3rd quarter, and a flat reading in the 2nd quarter

The expectation for the annual rate is for a tepid growth rate of 0.1%. With the economy still showing signs of strain, a further contraction in the 1st quarter of 2012 would mean that the economy is in a technical recession.

Last week data on retail sales help to boost some analysts expectations of a fourth quarter in which the economy actually showed some semblance of growth. Year-over-year, retail sales rose 2.6% in December, on the back of a 0.6% monthly gain

Therefore, it will be important to see exactly where the GDP data falls.
A negative reading would weigh on the GBP and likely increase the chances of more quantitative easing while a surprise to the top-side, with GDP increasing during the quarter could knock back some of the more pessimistic outlooks for the UK.

Both the BOE Minutes and 4th quarter GDP data will be released concurrently at 9:30 GMT during Wednesday's European session and will likely determine the direction of the GBP for the next few weeks until we get the BOE rate decision in early February.

Gov't Borrowing and CBI Realized Sales Can Also Help to Guide GBP

Also on tap this week will be data on net government borrowing which is important for measuring the austerity drive by the government.

If the government had to borrow more than expected that would undercut the effectiveness of the government's program while a reading that shows that the government borrowed less than expected could help bolster the government's program.

November's data helped as it showed the government borrowing less in 2010-2011 than it did in 2009-2010 during the month.

In regards to the expectations around retail sales, this week we get a look at the CBI realized sales – a leading indicator for consumer spending – which is expected to show a net 1% of retailers reporting sales better than they were a year ago in January. That would be a decline from the 9% net seen in December.
Therefore the jump in retail sales in December which we talked about earlier may be temporary and a result of steep discounts prior to the holiday shopping season. If the UK consumer retrenched again in the beginning of the 1st quarter then we can expect economic growth to remain weak.

 

Forex Exchange Morning Report

 

Market wrap

 

Risk markets probed higher. Much of the London session was driven by reports (from Germany's FTD for example) that a broad agreement between Greece and bondholders had been reached and negotiations were now focussed on detail, such as the level of the coupon on the swapped debt. A level of 4.0% is supposedly agreeable, although the IMF troika and Germany are pressing for closer to 3.0%. The S&P500 rose to a fresh post-July high of 1322 but then fell later in the NY morning by 0.9%, and is currently down 0.2%, after Dow Jones News reported a rumour that the IMF and EU will refuse to contribute any further towards Greece's rescue. The latest on this saga is a comment from an anonymous Greek official who said a final off er will be tabled on 13 February. Other asset classes were more resilient, the CRB commodities index up 1.2%. US 10yr treasury yields are 5bp higher at 2.07%, earlier at 2.09% and breaking above a five-week range. Eurozone peripheral yields are lower, the Greek 10yr down 59bp, Portugal down 18bp and Italy down 14bp.

The US dollar index continued its downward correction, losing around 0.5%. EUR rose from 1.2892 to 1.3053 and only slipped to 1.3005 after the negative DJ report. USD/JPY gyrated in a narrow 76.87-77.08 range. AUD rose from 1.0485 to 1.0573, a 2 month high, slipping in NY to 1.0517 with US equities. NZD rose from 0.8065 to 0.8142 - also a 2 month high, and then slipped to 0.8092. AUD/NZD firmed slightly from 1.2980 to 1.3010.

Economic wrap

 

Canadian leading indicators declined to 0.8% in December from an upwardly revised 0.9% (previously 0.8%) in January. Eight of the ten components were positive over the month with only the stock market and furniture sales negative.

The advanced estimate for the EC Eurozone consumer confidence survey revealed a modest increase in confidence to -20.6 in January from -21.3, the first increase in six months.

French Business confidence indicator slipped to 91 in January from 94 the previous month. This was the second consecutive monthly decline in the survey having peaked at 110 in June. There were particularly notable falls in both overall (to -32) and foreign (to -26) orders. Production outlook ticked lower to -37 while own-company production declined to -6 from -1..

Market outlook

 

AUD/USD and NZD/USD outlook next 24 hours: The local calendars are quiet. AUD momentum remains positive, now targeting above 1.0600. NZD has a similar upward bias with trend channel resistance at 0.8135.

Asia Open: EU Finance Ministers Express Their Reservations About The PSI Deal

The talk coming from Brussels is that the PSI deal is not acceptable in its current form and Luxembourg PM Juncker went as far to say that the Greek program is off track. Nevertheless, EU finance ministers have stressed that Greece's future is within the euro and EU Commissioner for Economic Affairs Rehn believes that a PSI deal will be forthcoming in the next few days. The stumbling block appears to be the coupon rate, with EU officials looking for an average rate of 4% for 30yr bonds.

The big event of the day in Asia is a BOJ meeting and the associated press conference, where the bank is expected to keep the overnight call rate unchanged. Nevertheless, the Outlook for Economic Activity and Prices is going to be released following the meeting and we expect a downward revision to both GDP and inflation forecasts for FY2011 and FY2012, but they are unlikely to be significant enough to prompt any more policy action.

Themes:

Germany is open to letting the two Eurozone rescue funds run in parallel, with a combined firepower of EUR 750 billion. This would represent a massive shift Berlin's policy, given that they have been stanchly against boosting the ESM or EFSF. However, in return German Chancellor Merkel reportedly wants Eurozone officials to sign up to rules aiming for more fiscal reform.

EU finance minister broke from a meeting in Brussels to state that the PSI deal had been rejected, but they expect a deal to be made in the next few days.

The BOJ is expected to keep the target cash rate at 0.10% during their meeting today.
Most equity markets in Asia are still closed due to New Year celebrations.

Euro Climbs Higher Amid Meeting Of EU Finance Ministers

The dollar continued to slide as sentiment moved moderately higher amid the EU finance ministers meeting, ongoing discussions regarding a Greek debt deal and ahead the Fed's two-day policy meeting which begins tomorrow. Several officials have expressed their views that Greek PSI talks are progressing and nearing an end – EU's Rehn said that PSI negotiations should be concluded 'shortly', IMF head Lagarde said that she is sure delivery will come on Greek talks, Germany and France's finance ministers noted progress on Greek talks and the Greek finance ministry said that PSI talks have been 'substantive'. While EU leaders are optimistic on a deal being reached soon, Greece noted that the PSI offer is due by Feb. 13.

In other Europe news, the EZ consumer confidence for January unexpectedly rose to -20.6 from the prior -21.3 (cons. -21.4). This helped to lift the common currency which was also supported by declining sovereign yield spreads. News out of the meeting of euro area finance ministers indicated that the group agreed on the European Stability Mechanism (ESM) based on Finland's proposal. EUR traded higher against most of the majors but was slightly lower against the Scandies. EUR/USD rose above the 1.30 psychological big figure and EUR/JPY is currently above the key 100.00 level.

In the U.K., Bank of England's Posen and Tucker spoke with Adam Posen noting that downside risks are 'materially reduced'. He went on to say that the stock of QE, not the pace, is more important for stimulus and that he would voter for additional QE in February if forecasts justify it. Paul Tucker gave fewer hints on his policy stance and said that banks should reduce their reliance on rating agencies. The pound underperformed amid speculation of further easing and ahead of the release of the BoE's MPC minutes and U.K. 4Q GDP report on Wednesday which is expected to show a contraction of -0.1%. GBP/USD was rejected from the 55-day SMA around the 1.56 figure and is currently around 1.5570.

U.S. equities were choppy trading in and out of positive territory and ultimately finished the day mixed. The DJIA closed to the slightly lower by about -0.09% while the S&P 500 climbed to finish marginally higher by about +0.05% to end the session. Commodities were mostly higher on the back of a weaker dollar with the precious metals gold and silver currently higher by about +0.67% and +0.36% respectively. WTI crude is higher by +1.65% and testing the key 100 level. UST yields were mostly higher as the yield curve steepened ahead of the FOMC meeting. 10-year Treasury yields advanced about 4.2bps to nearly 2.07%.

There is relatively light economic data flow due out in the upcoming Asia/Pacific session with only the November Australia Conference Board leading index. Also of note is the IMF economic outlook which will be released tomorrow and IMF head Christine Lagarde noted today, 'we will lower growth forecasts for most parts of the world'.

Stocks Mixed Ahead Of The FOMC Meeting

Asian Markets are set for a muted start to the day after US Stock closed mixed as Europe sought to tame its debt crisis and investors debated whether a three-week rally was warranted.

The S&P500 rose 0.62 points, or 0.05%, to close at 1316.00 with energies gaining and telecoms lagging. The Dow Jones Industrial Average finished 11.66 points lower, or 0.09%, at 12708.82, while the Nasdaq also slightly fell 2.53 points or 0.09%.

Stocks ended flat in quiet trading as investors continued to monitor developments in the Greek debt negotiations and ahead of the Fed’s two-day FOMC meeting this week.

The euro strengthened to an almost three-week high against the dollar as French Finance Minister Francois Baroin said negotiations between Greece and its private creditors are making “tangible progress.” The euro gained 0.8% to $1.3029.

Oil rose for the first time in four days after the European Union agreed to ban crude imports from Iran, raising concern that retaliation from the Islamic Republic may disrupt the oil supply in the Middle East. Oil for March delivery climbed $1.25 to settle at $99.58 a barrel.

Gold rose 1% on Monday to a six-week high, boosted by technical buying and as the euro rallied ahead of the outcome of a euro zone meeting on Greek debt restructuring. U.S. gold futures for February delivery rose $14.30 to settle at $1,678.30 an ounce.

Asia Session: The RBA Looks Set For Another Rate Cut

The FX and equity markets were fairly flat in Asia, with liquidity suffering as a result of New Year celebrations and the resulting closure of most stock markets in the region. At the same time, investors are clearly nervous about the situation in Greece, which may have kept a few traders on the sidelines as they await confirmation from European markets.

There was only one headline data release during the session, with the 4Q Australian PPI figure coming in slightly less than expectations at +0.3% q/q (expected +0.4% q/q). A relatively high aussie dollar should have pushed up the final prices received by producers, but the relatively weak PPI figure could increase the likelihood of another rate cut on Feb 7.

Nevertheless, the RBA will be closely monitoring the CPI figure to be released on Wednesday. The data has the ability to influence the bank's decision in two ways. Firstly, a negative figure will undoubtedly add to the case for a rate cut and a figure around the consensus of 0.2% will also likely provide more scope for a cut, given the downside risk to growth. However, a significantly higher than expected figure could delay the next rate move, despite the unstable conditions offshore, which has been a hallmark reason for the RBA's recent rate cuts.

EUR managed to break back above 1.2900 on a few occasions but could not sustain itself above this level, and on the downside the pair was unwilling to penetrate 1.2850. The aussie faired a little better, but still traded in a fairly tight range around 1.0450 – 1.0494.

In equity markets, AUS200 is currently in the red by around 0.34% and JPN225 is just holding its head above the water by approximately 0.07%.

Trading during the London session will likely be dominated by sentiment surrounding Greece and the upcoming EU summit. Athens and private sector bond holders have still not agreed upon a plan, and whilst it still looks like the market is not pricing in a Greek default yet, everyday that this is drawn-out the euro could suffer. Also, with the lack of deal in Athens, the EU leaders will not be able to sign off on the next round of austerity measures; instead the focus should shift to bringing forward the EUR 500 ESM fund to July.

Greece Debt Deal In Spotlight

U.S. Dollar Trading (USD) stocks continued to rally in the US Session but the Dollar gained as the Euro came under pressure with time running out for Greece to strike a deal with bondholders on the beleaguered nation's debt haircut. US housing data countered weakness in Google's stock with December Housing starts rising 5%. In US stocks, DJIA +90 points closing at 12720, S&P +1 points closing at 1315 and NASDAQ -1 points closing at 2786. Looking ahead, No data today and Chinese New Year holidays begin last all week and may affect the Asian session liquidity.

The Euro (EUR) the Euro hit day highs in late Asia but reversed in the European session with a break of 1.3000 going to require a positive outcome to the Greece debt deal negotiations still ongoing. Some news over the weekend that showed the standoff was entering the final phase saw heavy selling on Monday morning with traders unwilling to risk being long. Looking ahead, January Consumer Confidence forecast at -20 vs. -21.

The Japanese Yen (JPY) the USD/JPY remained above Y77 for most of the day but with EUR/JPY stalling at Y100 before easing on the Greece debt failure risk and profit taking on the move from Y97 to Y100 throughout the week. AUD/JPY is holding onto gains however with traders looking for higher levels now the cross is above Y80. Talk in the market about possible EUR/JPY intervention has drawn the conclusion that this is unlikely without major selling at a pace faster than we have seen so far.

The Sterling (GBP) the GBP/USD broke and closed above the 1.5500 level with EUR/GBP selling allowing the major to break its normal correlation with the Euro. December Retail Sales gained 0.6% as forecast m/m. Traders will be looking to the Greece news for whether the relief rally can continue.

Australian Dollar (AUD) was able to decouple from the Euro selling on Friday and Monday morning in Asia as the commodity currency continues to receive support after breaking higher earlier in the week. AUD/JPY is providing plenty of support as is the EUR/AUD which resumed its downtrend on Friday. Stock markets are doing very well so far in 2012 and if the trend continues the AUD/USD could retest all-time highs above 1.1000 this quarter. UPDATE Q4 PPI was at 2.9% vs. 3.0% forecast y/y.

Oil & Gold (XAU) Gold tested support below $1650 before reversing and closing just under the $1670 topside resistance. Some softer comments from Iran and the peaceful movement of US navy ships through the straight of hormuz sent Oil into a sharp slump as the risk premium of war was reversed out of the price. Support was found under $98 on Monday morning

Asian Market Update

(AU) AUSTRALIA Q4 PRODUCER PRICE INDEX (PPI) Q/Q:
0.3% V 0.4%E (1-year low); Y/Y: 2.9% V 3.0%E

(HU) HUNGARY JAN ECONOMIC SENTIMENT: -26.8 V -24.6 PRIOR; BUSINESS CONFIDENCE: -16.3 V -14.5 PRIOR; CONSUMER CONFIDENCE: -56.6 V -53.3 PRIOR
(JP) JAPAN DEC SUPERMARKET SALES Y/Y: -0.6% V -2.3% PRIOR

Markets Snapshot (as of 05:30GMT)

Nikkei225 +0.1%
S&P/ASX -0.3%
Kospi closed
Taiwan Taiex closed
Singapore Straits Times Index closed
Shanghai Composite closed
Hang Seng closed
S&P Futures -0.3 at 1,307
Feb Gold +0.5% at $1,672/oz
March Crude -0.2% at $98.13

Overview/Top Headlines

With only Australia and Japan open today due to the New Year's celebrations, Asian equity markets were subdued with thin trading. Both the ASX and Nikkei225 ended the session almost unchanged from opening levels. EUR/USD opened gapping down over 50 pips below $1.2880 with no progress in Greece. Dollar appetite returned with heightened uncertainty and limited liquidity in the region. Silver gained over 2% testing $32.50 before retreating. Australia's Q4 producer price index fell to a 1 year low q/q to 0.3% v 0.4%e; y/y also fell short of expectations at 2.9%. Commonwealth Bank of Australia economist noted that the high AUD is pushing down import prices and keeping inflation at bay and reiterated others sentiments that the door is "well open" to RBA rate cut by Q4 PPI data.

Weighing on the markets was the lack of progress between Greece and its private sector bondholders. IIF's Dallara said to have told EU press, "We are at a crossroads... Our offer, delivered to the (Greek) Prime Minister, is the maximum offer consistent with a voluntary PSI (private-sector involvement) deal... I think it's clear we are at the limits of a voluntary deal. I am optimistic... We made a lot of progress in Athens over the last few days." In a separate FT report indicating IIF's position may have included a loss of as much as 65-70% on current bonds' long-term value. Troika officials said to have requested a report on Greece debt sustainability as part of negotiations on bond swap agreement.

In the German press was reported that Italy PM Monti and ECB President Draghi seek to increase ESM capacity from €500B to €1T. Draghi already suggested using leftover funds from EFSF and transferring them to ESM for a total amount of €750B.

Looking ahead to tomorrow, we are expected the Bank of Japan rate decision. Rates are expected to be left unchanged and the BoJ is not expected to announce any new stimulus. However many analyst expect that the BoJ will cut its GDP forecast. Also on tomorrow's session expecting Australia Q4 CPI to gain only slightly from Q3's 0.6%.

Speakers/Geopolitical/In the press

(CN) Moody's: China's moderating non-bank financing growth lowers systemic risk concerns and is a credit positive for domestic banks

(JP) Japan Dep PM Okada: Rules out snap elections before consumption tax hike legislation is enacted - Nikkei News

(CN) China Premier Wen: China to face bigger challenges in the new Lunar year; Reiterates China will seek to "give more importance to people's lifestyles, and let the population share the fruits of the reform." - Chinese press

(CN) China State Administration of Foreign Exchange (SAFE): China banks saw net sales of FX in December for the second consecutive month - China Daily

Equities

TM: Australia President: Confirms press speculation, to lay off 350 employees (approx 7% of workforce in Australia)

HMC: To reduce workforce at domestic motorcycle plant, transferring staff to other parts of Japan - Nikkei News

QAN.AU: Entered into agreement with engineers union; deal to include 3% pay increase annually; Agreement through Dec 2014 - financial press

HIT: May discontinue production of flat-panel TVs in Japan by September due to tighter price competition - Nikkei

SNE: To relocate assembly of lithium ion batteries to Singapore and China by the end of FY13/14 - Nikkei News

US Equities

RIMM: Co-CEOs have resigned; Lazaridis to become vice Chairman, Balsillie to remain a director; Names Thorsten Heins new CEO effective immediately

FX/Fixed Income/Commodities

(IR) UK and French ships join the US in the Strait of Hormuz - UK press
OPEC Sec Gen: $100/brl price of oil is acceptable to consumers and producers; Does not weigh on global economy

(AU) Newcastle Coal Exports +43% v -14% prior in week ended Jan 22nd
(KR) South Korea Agriculture Ministry: Will resumes imports of beef from Canada - Korean press
EUR/CHF: (CH) Switzerland Econ Min: CHF expected to weaken in the medium term - financial press
(RU) Russia vice-min for Energy Ministry: 2011 output of crude oil rose to a record 511M tons, but unlikely to increase in the next 3 years - Russian press

Asia Open: Once Again, Greece Dominates Investor Sentiment

Greece remains the focus of investor sentiment as private sector bond holders and the government attempt to reach a deal. The deal is reportedly going to involve a hair-cut of around 70%, but the point under the most contention appears to be the coupon rate offered to private investors. The IMF and some European officials believe that the current rate being negotiated is too high given Greece’s current economic situation.

Nevertheless, the IIF does sound hopeful that an arrangement can be reached, noting that elements of the deal are coming into place. This represents a more optimistic tone that we are used to seeing from the IIF, but we are unnerved by the fact that IIF Chair Dallara and his second in command have apparently left Athens, leaving the job of negotiating a deal to a smaller team of IIF members.

We are now doubtful that a deal will be ready for the EU meeting today. In which case, EU members will not be able to sign off on Greece’s next austerity package, which Athens needs to avoid a disorderly default on March 20 Price action this morning highlights how nervous investors are over the Greek situation, with the euro hitting 1.2851 shortly after FX markets opened. AUD/USD also took a hit but managed to recover some ground ahead of PPI figures out of Australia. The headline figure came in at +0.3% q/q, slightly lower than the expected +0.4% q/q.

Markets in Asia might be fairly subdued today due to New Year holidays throughout the region keeping some markets closed. Furthermore, there is a complete lack of headline data releases during the session and traders could be unwilling to make big moves without confirmation from European markets.

Forex Exchange Morning Report

 

Market wrap

 

Commodity currencies and US treasury yields advanced but equities and commodities were capped during London and NY sessions which were largely devoid of significant news. Greece's Proto Thema reported that the country and banks holding its debt had reached an agreement involving a debt swap into 30 year bonds with an initial coupon of 3.10% rising to possibly 4.75%. That, plus a WSJ article by Hilsenrath suggesting there is little chance the Fed will raise the prospect of further QE at this week's meeting , helped the US 10yr yield rise from 1.96% to 2.03%, still inside the 1.80%-2.04% range since mid-December. US equities were hurt by a sub-consensus earnings result from Google, despite positive surprises from IBM, Microsoft and Intel, but staged a late rally to finish up just 0.1%. The CRB commodities index closed 0.7% lower, copper -1.5%, oil -2.2% but gold +0.5% and silver +5.1%. Eurozone 10yr bond yields were mixed, France and Italy down 5bp and 12bp but Greece and Spain 24bp and 26bp higher.

The US dollar index changed little on the day. Under-performing most, EUR fell from 1.2986 to 1.2887 in London but closed in NY higher at 1.2931. USD/JPY fell from 77.30 to 76.92, closing at 77.04. Speculative futures positioning as at the previous Tuesday was reportedly made a fresh record low. AUD outperformed, rising from 1.0383 in London to 1.0489 (last seen in 1 November) in NY. NZD also fared well, rising from 0.7995 to 0.8064. AUD/NZD rose from 1.2960 to 1.3000

Economic wrap

 

US existing home sales up 5% in December. The annualised sales pace of 4.61mn was the second highest of the last year, after January, but only slightly ahead of the 4.43mn sales pace recorded in Q3 2009, the first quarter of the economic recovery.

Canadian CPI fell 0.6% in December. Much softer than expected, taking annual infl ation down from 2.9% to 2.3%. A sharp drop in energy prices was a prominent factor, but the downward pressure on prices was widespread - the core measure fell 0.5% for the month and slowed to 1.9% on an annual basis, just below the midpoint of the Bank of Canada's target range.

German producer prices fell for similar reasons. The index fell 0.4% in December, and annual infl ation slowed to 4.0% from a peak of 6.4% in April last year.

UK retail sales rose 0.6% in December on both the total and core measures. Spending was up 2.6% on a year earlier - aside from a brief spike last January, this was the quickest pace since the recession began.

Market outlook

 

AUD/USD and NZD/USD outlook next 24 hours: Australian PPI for Q4 today will warm the markets for Wednesday's important CPI release. AUD's break above 1.0450 on Friday maintains the positive momentum since mid-December and suggests an upward bias today with minor resistance at 1.0500. NZD similarly remains inside a five-week old ascending channel, minor resistance at 0.8080

 

The Australian Economy Is Likely To Speed Up In 2012

The Australian economy is expected to accelerate this year as mining-sector investment drive growth, yet it increases the core inflation to 3%, which is between the RBA's targeted range of 2% & 4%.

The Australian economy issued the fourth quarter's figures for the producer prices index, as it retreated to 0.3% compared with the prior reading of 0.6%, also it came below forecasts of 0.4%.

Also, the annual reading was released as well, where the annual PPI reading for the fourth quarter rose to 2.9% compared with the prior reading of 2.7%, yet it came below expectations of 3.0%.

As, the nation's Gross domestic product will expand to 3.6% in 2012, compared with last year's expectations of 2%, along with the underlying inflation, which excludes the most volatile components, is estimated to reach 2.5% this year compared with the prior year's estimates of 1.8%.

The Reserve Bank of Australia (RBA) cut down the benchmark rate by a quarter percentage (25 points) on November the first, and again on December the sixth, which is the first consecutive reductions since 2009, as inflation pressures eased, which helped the policy makers to cut down the interest rate by 50 points to sustain the nation's growth, as risks to global growth increased.

Additionally, reserve-Bank Governor Glenn Stevens reduced the overnight cash rate target to 4.25 percent from 4.5 percent in December, considering Europe's turmoil and the current global turbulences in the financial markets and an increased chance of a further material slowing in global growth, which increases investor's speculations by 79% chance of a further cut via Governor Glenn Stevens by another quarter percentage point at the next meeting on February the seventh.

Lastly, Australia’s currency has dropped about 6% since it reached its highest level of $1.1081 on July 27, as the AUD at the beginning of today's trading session retreated against the U.S. dollar amid the PPI news, where the AUD/USD pair is currently trading around the level of 1.0464$, after recording its highest at 1.0492 and lowest at 1.0456.

Stocks Post Another Weekly Gain, Longest Since October

Asian Markets are set to start the day higher after U.S. stocks rose for a third week, the longest winning streak since October, as better-than- estimated economic data and company earnings boosted confidence in American growth.

The S&P500 rose 0.88 points, or 0.07%, to close at 1315.38 with 9 out of 10 sectors closing higher. The Dow Jones Industrial Average finished 96.50 points higher, or 0.76%, at 12720.48, while the Nasdaq slightly fell 1.63 points or 0.06%.

Technology and energy companies led rallies by nine out of 10 Standard & Poor's 500 Index groups, climbing more than 2.7%. Sears Holdings Corp. added 46% amid speculation it may go private and optimism CIT Group Inc. will approve financing for the retailer's vendors. Bank of America Corp. (BAC) led Dow Jones Industrial Average gains after posting a profit. International Business Machines Corp. increased 5.2% after forecasting earnings that beat analysts' estimates..

The euro rose for the first time in seven weeks after bets the 17-nation currency would weaken reached a record and as member nations' borrowing costs fell at bond auctions, mitigating debt-crisis pessimism. The euro rose 2%to $1.2931, the biggest weekly gain since Oct. 14.

Oil fell to the lowest level in a month as Chinese manufacturing contracted and negotiations to resolve Greece's debt crisis entered a third day, fanning concern that Europe's economy will slow. Crude for February delivery dropped $1.93 to $98.46 a barrel.

Gold's rise was eclipsed by a 4% surge in silver on Friday, with investors optimistic about the technical picture and prospects for a Greek deal soon with private bondholders. U.S. gold futures for February delivery settled up $9.50 at $1,664 an ounce.

Daily Financial Market Outlook

The fundamental drivers of UK consumer spending remain less than helpful as evidenced by this week’s wage, unemployment and confidence data. Yet recent retail sales volumes have been supported by discounting by retailers. December’s figures look to have been further boosted by two other factors. First, a national strike day, in the public sector, allowed some people to head to shopping centres, while Christmas day falling on a Sunday provided an extra Saturday’s shopping the day before. The BRC survey recorded a sharp jump in total sales - although the true underlying rise was obscured by last December’s snow. As such, a lot of uncertainty surrounds this month’s release. We look for a punchy 0.9% rise in volumes, with the annual rate up to 2.7% - the second highest level since 2008. But this is likely to prove a short-term boost, with the longer-term outlook remaining troubled.

Recent US economic data has generally pointed to an upswing in activity but yesterday saw weaker than expected December housing starts. Nevertheless there have been some encouraging signs in the US housing sector of late. For example, this week the NAHB housing market index rose for the fourth straight month in January to its highest level since June 2007. Existing home sales figures out today should show that this improvement in confidence is translating into a rise in market activity. As of November sales were up over 10% from their summer lows and we expect that another solid rise took place in December. Although of course this would still leave sales nearly 40% below their 2005 cyclical peak

Devember UK retail sales supported by further discounting

Preview: Canada CPI - Where Next For USD/CAD As It Tests Key Support

Release: CAN CPI m/m (Dec)
Consensus Forecast: -0.1%
Previous: 0.1%
Release: CAN Core-CPI m/m
Consensus Forecast: -0.2%
Previous: 0.1%
Date/Time: 01/20/12 – 7AM ET (12:00 GMT)
Softer Inflation Means No Pressure on BOC, Can Hold Rates Steady for Longer

The Bank of Canada interest rate decision and statement has come and gone.

On the inflation front, 'the profile for inflation is marginally firmer' and that 'several significant upside and downside risks are present in the inflation outlook' the BOC said.

Which way will inflation go, to the upside or the downside? In Friday's session we get the latest reading on consumer prices from Canada – for December – and the expectation is for some disinflation to show up in the data.

The headline CPI is expected to decline 0.1%, while core CPI is expected decline 0.2%. That compares to a 0.1% gain in both the headline and core rate in November.

If inflation does ease it lessens any pressure on the Bank of Canada to raise interest rates sometime in 2012.

In fact most economists now expect the bank of Canada to remain on hold throughout all of this year, raising interest rates only in the first half of 2013.

The factor that would speed up this timetable would be if inflation showed persistent stronger-than-expected gains.

Relief Rally And Euro Short Squeeze

U.S. Dollar Trading (USD) banks led global stock markets higher as the European debt crisis continued to show signs of easing after solid Auctions in 10yr Spanish and French bonds overnight. US data also underpinned the move higher with the weekly Jobless claims falling 50k to 352k in a widely noticed improvement in the US Job market. In US stocks, DJIA +45 points closing at 12624, S&P +6 points closing at 1314 and NASDAQ +18 points closing at 2788. Looking ahead, December Existing Home Sales forecast at 4.65mn vs. 4.42mn previously.

The Euro (EUR) the Euro rallied sharply for a second day heading back towards 1.3000 as fears the debt crisis spreading begin to ease and shorts in the market take profit. Most crosses led by the EUR/JPY had very strong gains and helped sustain the majors rally. The big risk event ahead is the Greece debt deal with a conclusion expected in coming days. Failure to reach an agreement would see the recent gains quickly given back. Looking ahead, December PPI forecast at 0.1% m/m.

The Japanese Yen (JPY) USD/JPY popped back above Y77 as the EUR/JPY tested Y100 in a sharp rally in the US session. AUD/JPY is also back above the key Y80 level and more gains are on the table if stocks continue to push into fresh year highs. There is still interest from Japanese companies to hedge EUR/JPY on rallies with concern the important cross will continue to trend lower this year.

The Sterling (GBP) did well as sentiment improved gaining towards 1.5500 on the major and not losing much ground against the Euro. The GBP/JPY has also been underperforming lately and sharp buying in the cross along with GBP/AUD short covering helped underpin the Cable move higher. A positive Greece deal may see the relief rally continue. Looking ahead, December Retail Sales forecast at 0.6% vs. -0.4% previously m/m.

Australian Dollar (AUD) the AUD/USD underperformed in the risk rally as December Unemployment shocked at -29k vs. +10k forecast. The EUR/AUD leapt at the opportunity to move 200 pips higher off all-time lows. The market has been selling the EUR/AUD for months and the unwind could be brutal in coming days. Looking ahead, Chinese HSBC PMI previously at 48.7.

Oil & Gold (XAU) Gold rallied to $1670 before easing back $1650. Oil tested $102 before also easing of profit taking back to the $100 level.

Forex Exchange Morning Report

Market wrap

 

Another small rally in equities. The S&P500 continued its run of small daily gains, up 0.5% as we write. The news flow was net positive, but not dramatically so. French and Spanish bond auctions for 7yr and 10yr maturities went well, and Austria saw good demand at its 50yr auction. Q4 US earnings reports from Bank of America and Morgan Stanley helped those shares outperform, and US jobless claims data was encouraging (although other releases were mixed). The CRB commodities index is 0.3% higher, oil -0.3%, copper +1.3% and gold -0.4%. US 10yr treasury yields are 9bp higher at 1.99%, fi nally reacting to the week's positive sentiment. Eurozone peripherals were well behaved, apart from the Greek 2yr note's yield which rose 1917bp to a record high of 189.88% amid opaque negotiations with bondholders.

The US dollar index is around 0.4% weaker and is breaking below the upward channel which started on 9 November. EUR has broken above its descending channel, rising from 1.2840 to 1.2941 in London and NY. Safe-haven yen underperformed, USD/JPY rising from 76.70 to 77.32. AUD and NZD also underperformed, thanks to weak inflation and jobs reports, respectively, yesterday. AUD found an overnight low at the London open at 1.0371 and rose to 1.0434 but reversed in NY to 1.0395. NZD consolidated in a narrow 0.8002 to 0.8029 range. AUD/NZD fi rmed from 1.2940 to 1.3010 in London but slipped in NY to 1.2960

Economic wrap

 

US consumer prices flat in Dec for the second month running. Food prices rose 0.2%, energy was down 1.3% and the core rate was 0.145% before rounding to 0.1%, with clothing and car price falls off set by a 0.2% rise in the high weighted rent component. The headline annual rate fell to 3.0% yr but the core annual pace was steady at 2.2% yr.

US housing starts fell 4.1% in Dec entirely due to a 20% fall in multiples, reversing the Nov gain. Single family starts rose 4.4%, their third straight gain. Permits were down 0.1%, also due to multiples with single family permits also up for three months running (1.8% in Dec). More evidence the housing market is bottoming out.

US initial jobless claims fell 50k to 352k in the week ended 14/1, after a 27k rise in the fi rst week of Jan, with the Labor Dept noting seasonal adjustment issues around the new year as a factor behind recent volatility. There still seems to be a downtrend apparent suggesting fewer layoff s since late 2011.

US Philadelphia Fed index rose from 6.8 to 7.3 in Jan (annual revisions applied this month) but the detail showed shipments and orders both down 3-4 pts to 5.7 and 6.9 respectively, while jobs were steady at 11.6.

Canadian manufacturing sales up 2.0% in Nov, their fourth rise in fi ve months, driven by machinery, energy and autos.

Euroland current account defi cit €1.8bn in Nov, down from €6.6bn in Oct, UK consumer confi dence down 2 pts to 38 in Dec according to Nationwide, the second lowest on record after Oct's 36.

Market outlook

 

AUD/USD and NZD/USD outlook next 24 hours: In the only local event worth watching today, Australia's terms of trade today is expected to slip. AUD should again remain inside a 1.0360-1.0450 range. NZD remains inside an ascending channel which started on 15 December, today's likely range 0.7980-0.8080

Asia Open: This Is A Critical Time For Europe And EUR

The euro is driving at full speed towards 1.3000 against the buck, but can the pair break one of the most significant psychological barriers in the FX market? Our concern is that some of the fundamentals behind the rally might quickly unravel.

Firstly, Greek PSI negotiations have a long way to go and Greek finance minister Venizelos has stated that the bulk of discussions need to be completed by Friday at noon (local time), so that any plan can be made public on Monday. Also, even if the IIF and the government reach a deal there is no guarantee that Greece will continue down a path of fiscal reform.

Secondly, the proposition by IMF head Lagarde to boost the fund by a massive EUR 620 billion is great in theory but faces some significant headwinds. The most paramount question being; where are the funds going to come from? Basically, the US and China need to play ball and get out their money clips, but so far neither country has committed to contributing more funds.

Attention in Asia is now shifting to January's HSBC flash manufacturing PMI figure out of China at 13:30 AEST. Previously, the figure came in just below expansion territory at 49 and jump above 50 this month might combine with the current positive risk sentiment to lead a further rally in risk assets. However, recent trade figures highlight the impact that diminishing levels of global demand are having on the Chinese economy, which could flow on to the manufacturing sector and keep the headline figure below 50.

In Australia, traders are awaiting the release of trade prices at 11:30 AEST, which we expect to show that Australia's terms of trade peaked in Q3. Consensus estimates are pointing towards a 0.6% q/q increase in the import price index and a 2.0% q/q decrease in the export price index.

Dollar Extends Decline As Sentiment Advances

The buck extended its decline against most of the major currencies as markets continued to trade with a risk-on tone amid better US jobs data, successful EU government auctions and better than expected earnings. The dollar was weakest against European currencies with the SEK outperforming (currently up +1.06% against the USD). The greenback was slightly firmer against the Japanese yen as well as the commodity currencies AUD, NZD as a result of weak economic data overnight. New Zealand 4Q consumer prices unexpectedly fell -0.3% q/q (cons. +0.4%) while Australia’s employment change showed a surprising decline of -29.3K in Dec. (cons. +10.0K).

There were plenty of U.S. data releases today, most notably weekly initial jobless claims which fell 50K to 352K from an upwardly revised 402K. The print was the lowest reading since April 2008 and the 4-week moving average in initial claims declined by -3.5K indicating that the labor market is moving in the right direction. December housing data was not as bright as building permits declined -0.1% to 679K from the prior 680K and housing starts saw a drop of -4.1% to 675K from 685K as the housing market continues to struggle. Regional manufacturing readings showed expansion with the Philadelphia Fed index printing 7.3. December CPI figures were mostly in line with expectations with the m/m headline reading at 0.0 while the core reading came in at 0.1% m/m.

Despite better than anticipated Nov. manufacturing sales (2.0% vs. exp 1.2%), the Loonie was mostly softer as commodities declined with WTI crude lower and testing the 100 level. USD/CAD broke below long term triangle support to test session lows of nearly 1.0070 before rebounding to current levels just above the 1.01 figure.

The euro continued to rally after successful auctions in France and Spain and as Greek debt talks progressed. The French auction was the first since the country lost its AAA rating from S&P, which saw borrowing costs fall. The IIF said that debt talks with Greece today were ‘productive’ and that negotiations will resume tomorrow. EUR/USD surged on a break above the 21-day SMA and appears to be approaching the 1.30 big figure.

Bundesbank President Weidmann was on the wires again today repeating comments made yesterday as he urged the ECB against engaging in unlimited government bond purchases as it would violate EU law. On the German economy, Weidmann said that while it may have shrunk slightly in 4Q, it is expected to grow 0.6% this year and 1.8% in 2013.

The yen was weaker and USD/JPY tested near the highs of January as the pair rallied to the 77.30/35 level. USD/JPY sees the convergence of 21 and 100-day SMA’s come in around 77.15/20 which is likely to be a pivotal level on a daily closing basis. EUR/JPY also moved sharply higher to test the 100.00 big figure which looks to be near term resistance as the pair currently trade around the 99.90 level. The weakness in the yen comes as markets trade with a risk-on tone and sells safe havens in favor of riskier assets.
U.S. equities finished higher for the third consecutive session with the DJIA closing up about +0.36% while the S&P 500 advanced +0.49% on the day. UST yields were higher across the curve with the 10-year yields up nearly 8 bps to about 1.97%. In the commodity space, gold is currently lower by about -0.17% while crude oil is down about -0.18%.

Due out of the Asia/Pacific session are China’s January unofficial HSBC flash manufacturing PMI and MNI flash business sentiment survey. Japan’s November all industry activity index, coincident index and leading index are also set for release as well as Australian 4Q import and export price indexes

Markets Rally On Improving Global Prospects

The Australian equity markets are pointed to solid start to the trading after the US stocks rallied overnight on improving global prospects.

The Dow (see above chart) finished the overnight session up 83 points to finish at 12587 while the S&P500 index gained 8.25 points to close at 1310.25.

The euro rallied to a two week high against both the yen and dollar after Spain continued to sell debt boosting optimism that the region’s debt crisis is being contained. EURJPY has traded up from overnight lows of 98.53 to recent highs of 100.00.

The AUDUSD has slid for the first time in three days after a government report showed that employers unexpectedly cut jobs in December.

WTI crude traded down from highs of USD102.08 per barrel to as low as 100.00 per barrel after Natural Gas priced tumbled to their lowest prices in 10 years and inventories rose.

The volatility index which is the best gauge of investor’s fears fell below 20 for the first time since June.

Euro Rebound Continues after Successful Auctions

USD mostly weaker as markets continue to trade with a risk-on tone. The Dollar Index is lower for the third straight session and approaches the 80 level as it now trades below the daily Kijun line. Global equities are higher, U.S. stock futures suggest a positive start to the day and UST yields are broadly higher. The buck is weakest against the Scandies - it is currently down about -0.87% against the SEK and -0.66% against the NOK.There was plenty of data released earlier with no monthly change in the headline CPI reading while the core reading printed +0.1% m/m. Housing data showed a decline of -0.1% in building permits to 679K from 680K and a drop of -4.1% in housing starts to 657K from 685K in December. Weekly initial jobless claims fell by 50K to 352K from an upwardly revised 402K at the previous print. Overall, the inflation data was mostly in line with expectations, housing was slightly softer and labor data better as jobless claims continue to trend lower. Due out at 1000ET is the January Philly Fed index which is forecast at 10.3 from the prior 10.3.
EUR has rebounded significantly against most of the majors as sentiment continues to improve.

Auctions today saw borrowing costs fall in Spain and France. The French auction was the first since the country lost its AAA rating from S&P, which did not appear to affect its ability to issue debt. ECB President Mario Draghi spoke earlier and said that he sees 'significant progress' on the fiscal front in Europe, however he noted that the economic situation could worsen. Draghi went on to say that he expects demand for the second 3-yr loan to be 'quite high' and on the topic of ECB bond purchases, he noted that the buys are limited in time and amount. EUR/USD continues to trade higher - currently above the 1.29 figure after having broken above the 21-day SMA.

CAD is mostly firmer on the back of better data, increased risk appetite and higher oil prices. Nov. manufacturing sales rose by more than expected with a monthly gain of +2.0% from the prior -0.6% (cons. +1.2%). Oil is currently higher with WTI crude up about +0.94% and global equities are up across the board. USD/CAD is trading below the base of long-term triangle support and sees the 50% retracement of the rally from July lows to October highs come in around 1.0030/35 as possible support ahead of parity.

AUD lower across the board after a soft December employment report. The employment change fell by -29.3K from the prior -7.5K (cons. +10.0K) with the losses coming from a -53.7K decline in part time employment while full time employment added +24.5K jobs. The unemployment rate unexpectedly fell to 5.2% from 5.3% as the participation rate declined to 65.2% from 65.5%. The weakness in the employment data now suggests further easing in policy by the RBA. The Aussie is weakest against the Scandies (currently down -1.00% against the SEK). AUD/USD is slightly weaker but remains above the 200-day SMA which is around 1.0405/10 as the pair currently trades around 1.0425.

GBP mixed against the G10 currencies - softer against the SEK, NOK, CHF, CAD, and EUR while slightly stronger against the USD, JPY, AUD and NZD. There was little data out of U.K. with only Nationwide consumer confidence that fell to 38 in December as expected from the prior 40. GBP/USD is currently around the 1.5450 level and sees the daily Kijun line come in around the 1.55 figure as the next level of potential resistance.

China's Economy Expanded At The Slowest Pace In 10 Quarters

The Chinese economy expanded in its slowest pace in at least 10 quarters, as the moderated demand on the Chinese exports due to the global slowdown in demand was negatively affected the Chinese economic growth.
The Chinese Gross domestic product, the value of all goods and services produced for the final quarter in 2011 recorded a contracted reading of 2.0%, compared with the prior reading of 2.3%.

Also, the annual GDP for the 4th quarter recorded a contracted reading of 8.9%, compared with the prior reading of 9.1%, yet it exceeded expectations of 8.7%, Growth fell below 9 percent for the first time since mid-2009.

On the other hand, the data for the annual industrial production figures for December were released as well, as it rose to 12.8% compared with the prior reading of 12.4, yet it exceeded expectations of 12.3%.

US Holiday Thin Markets, EFSF Downgraded

U.S. Dollar Trading (USD) the US markets were closed for a bank holiday so had little reaction to the downgrades from Friday in Europe. The EFSF was also downgraded by one notch but this was widely expected and also had a muted reaction. The market is still very short the EURO and any good news would once again prompt a short covering rally as the downside begins to look exhausted in the short term. In US stocks, closed. Looking ahead, January NY FED forecast at 11mn vs. 9.5mn

The Euro (EUR) support was solid at Friday’s low near 1.2625 and the market crept higher for the rest of the day. The downgrade of EFSF could mean that Germany would have to bear a bigger burden with its AAA rating to give more confidence to the markets. Looking ahead, Spanish Bond Auctions. January German ZEW forecast at -50 vs. -53 previously.

The Japanese Yen (JPY) the USD/JPY traded the Y76.70 to Y76.90 range with the holding pattern seen continuing while the action remains on the Crosses. EUR/JPY held above Y97 with a small bounce in holiday affected markets. The outlook is still negative but traders are always wary of intervention and short covering rally. The AUD/JPY is still well supported and could be looking for a test of Y80 if stocks remain strong.

The Sterling (GBP) the GBP/USD kept above the 1.5300 and move up to 1.5340 in quiet trade during the European session. The market is still looking to push EUR/GBP lower but is struggling to break 0.8250. Some traders believe that the UK rating may come into question soon so are cautious on expressing any improvement in risk appetite through buying the GBP/USD.

Australian Dollar (AUD) the Aussie continues to receive support on dips but is not breaking to the topside. Traders suggest a move above the 200day moving average at 1.0400 would support the AUD/USD and could put 1.10 back on the table. Commodities led by Gold and Oil are expected to do well going forward and are part of the bullish Aussie story. More important in the short term and we have a raft of Chinese data today that may inspire fresh movement. Looking ahead, Q4 Chinese GDP forecast at 8.7% vs. 9.1% previously.

Oil & Gold (XAU) Gold is pivoting the $1640 level in quiet trade closing for half the day with US on holiday. Oil was very quiet but grinded higher towards $100 closing just under the key level.