Euro Dips On Juncker's Comments, Yen Profit Taking Continues

The euro extends its retreat against most major currencies, except the Swiss franc, as weighed down by comments from Luxembourg Prime Minister Juncker that the euro's exchange rate is "dangerously high." Nonetheless, Juncker expressed his confidence that the eurozone "has become more stable after lots of efforts" and unlike last year, he didn't see a risk of breaking up.

Spanish prime minister Rajoy said that the OMT option is there and "it would be absurd to rule it out for all time." But he also noted that "at this point, we believe that it is not necessary." He also expressed his confidence that "Spanish financial institutions will not require any more funds than were given already." Meanwhile, he urged Germany to boost growth as noted that "what is clear is that you cannot ask Spain to adopt expansionary policies at this time. But those countries that can, should."

EUR/USD is back below 1.33 level at the time of writing while EUR/JPY is back pressing 117. EUR/GBP and EUR/AUD are also showing sign of temporary topping. But there is no indication of reversal so far and we view the current retreat as part of consolidations only.

The Japanese yen also extend its recovery against other major currencies today. It should be well priced in that BoJ would expand it's stimulus program and double the inflation target to 2% next week. What matters most is that BoJ needs to show its determination to boost inflation to its target, like adopting unlimited asset purchase or removing the 0.01% deposit rate.

Traders are taking profits ahead of the meeting as at this point, it's not too likely that BoJ would do something to give the yen sell-off more fuel. Nonetheless, downside of the retreat in yen crosses should be contained by near-term support levels before the meeting. That is, 86.82 in USD/JPY, 113.54 in EUR/JPY and 139.39 in GBP/JPY. We'll see how yen crosses would respond to the post meeting announcement.

In the US, Boston Fed Rosengren said that there is "capacity to enlarge" the quantitative easing program if that were to become necessary. He noted that Fed wants "substantial improvement in the labor markets" and getting unemployment rate to drop by half a percent would be good time to determine whether the economy was growing rapidly enough. But at this point, it's "difficult to strategize what our response would be without knowing what the source of potential weakness would be."

Minneapolis Fed Kocherlakota said that Fed is ready to "provide more needed stimulus" by lowering the unemployment rate threshold from 6.5% to 5.5%. He said Fed would "facilitate a faster return of the unemployment rate to its lower long-run level by adopting a more accommodative monetary policy that puts more upward pressure on employment." And his outlook for unemployment and inflation both "point to a need for more accommodation."

The World Bank sharply lowered its 2013 global growth forecast to 2.4%, comparing to prior projection of 3.0%. That's just a slight improvement from 2.4% in 2012. The World bank noted that global recovery is expected to be "closer to the end of the first quarter and into the second quarter of 2013, rather than beginning a little earlier."

It warned that the "global economic environment remains fragile and prone to further disappointment" even though risks are less skewed to the downside now. And, it noted that policy uncertainty in US has already dampened growth and warned that Should policymakers fail to agree such measures, a loss of confidence in the currency and an overall increase in market tensions could reduce U.S. and global growth by 2.3 and 1.4 percent respectively."

For advanced economies, growth is expected to be very weak at 1.3% in 2013 as weighed down by austerity, high unemployment and sentiments. That's a sharp downward revision from June's forecast of 1.9%. Growth is then expected to recover slightly to 2% in 2014 and 2.3% in 2015. US is expected to grow 1.9% in 2013, the eurozone to contract -0.1%, and Japan to grow at 1.5%.

For developing countries, growth is expected to be the slowest in a decade at 5.5% in 2013, also revised down from June's projection of 5.9%. Growth is then expected to pick up to 5.7% in 2014 and 5.8% in 2015. China's growth is expected to rise to 8.4% in 2013 then slow to 7.9% by 2015.

On the data front, Australian Westpac consumer confidence rose slightly to 100.6 in January. Japan domestic CGPI rose 0.3% mom in December. Machine orders rose 3.9% mom in November. Consumer confidence dropped to 39.2 in December. Swiss retail sales and Eurozone CPI will be released in European session. A number of indicators will be released from US including CPI, TIC capital flows, industrial production, NAHB housing market index. Fed will also release Beige book economic report.