Euro Maintains Post ECB Gains

Yen and, to a lesser extent, dollar were sold off sharply overnight as risk appetite sent S&P 500 to close at five-year high of 1472.12. Asian equities opened higher but pared gains after stronger than expected inflation reading from China. Nikkei, though, maintained gain as Prime Minister Abe unveiled a JPY 10.3T fiscal stimulus plan.

In the currency markets, euro was the strongest performer following ECB and took other European majors higher. An important point to note is that EUR/CHF also jumped overnight and breached 1.2129 minor resistance while indicates more near-term strength ahead in euro. Yen is particularly weak as selloff resumed ahead of next week's BoJ meeting.

Euro's post ECB strength was impressive. As widely expected, the ECB left all its main interest rates unchanged in January, in line with our and consensus expectations. Thus, the refinancing rate remains at 0.75% and the deposit rate remains at 0%. President Draghi stated that the decision was made unanimously. Economic weakness is expected to persist into 2013. Same as in December, the central bank expects to see gradual recovery "later" in 2013.

Concerning inflation, the statement reiterated that it "should remain contained ... with inflationary expectations firmly anchored." Meanwhile, "risks to inflation over the medium-term are seen as broadly balanced."

Technically, EUR/USD would likely break 1.3308 near term resistance to resume recent rally for next key level of 1.3486. EUR/JPY has already resumed recent rise and should be heading to 120 psychological level. EUR/GBP will revisit near-term resistance at 0.8224 Friday or early next week. EUR/AUD also showed sign of near-term reversal by breaking 1.2527 minor resistance. EUR/CHF's break of 1.2129 minor resistance indicates that consolidation from 1.2168 is already finished at 1.2063. And further rise should be seen in near-term back to retest 1.2168 resistance.

In Japan, prime minister Shinzo Abe unveiled a JPY 10.3T similar plan to boost recovery and end inflation. The plan is expected to boost GDP by 2% and create 600k jobs. Abe said that "we need to say good-bye to the shrinking economy and aim to achieve a strong economy where innovation and new demand lead to more jobs and income." JPY 3.8T will be spent for disaster prevention and reconstruction, JPY 3.1T will be used to stimulate private investments.

The stimulus package is expected to be financed by a JPY 13.1T extra budget to be approved next week. And Abe said the government would also "aim to achieve a primary balance surplus." Also, there are speculations that BoJ will double it's inflation target to 2% at its meeting next week, responding to Abe' request, without setting a deadline for achieving the target.

In China, CPI rose more than expected to 2.5% yoy in December, comparing to prior month's 2.0% yoy and expectation of 2.3% yoy. Looking at the details, food price jumped a strong 4.2% yoy, the highest since May. Services price jumped 2.5% yoy, fastest since October 2011. Combined with a strong trade data released Thursday, the data makes further strong policy easing less likely. Meanwhile PPI dropped more than expected by -1.9% yoy.

Looking ahead,Swiss headline CPI probably picked up to -0.3% y/y in December from -0.4% a month ago. In the UK, industrial production dropped -2% y/y in November, following a -3% slide in October, while manufacturing production slid -1.3% y/y after a -2.1% decline in October. In the US, trade deficit might have picked up modestly to USD 41.1B in November from 42.2B in the prior month.