Euro Soars On ECB Expectations, Yen Dives With Focus On BoJ

The euro soared broadly last week as expectations of an ECB cut receded drastically following Draghi's post meeting press conference. Strength of the common currency was impressive considering that the sleeping EUR/CHF also jumped over 100 pips and broke out from recent range. The Swiss franc was already the second strongest currency last week.

The sterling, though, lagged behind other European majors on weak economic data. The Japanese yen extended its recent selloff on expectation of further policy easing from BoJ next week, as well as announcement of fiscal stimulus package from the government. Solid trade data from China boosted market sentiments in general and sent global equities higher, with S&P 500 closing close to a newly made five year high. Commodity currencies also gain against dollar last week, taken higher by risk appetite, with Aussie gaining outperforming on its close tie with China.

Technically, strength of euro should be noted. EUR/USD and EUR/JPY have extended recent rally. EUR/GBP also resumed recent rise and has taken out a medium term fibonacci level, which suggests more upside is coming. EUR/CHF also broke through a near-term resistance level at 1.2168. These are signs of solid buying behind the common currency. A major question is whether the euro would outperform the aussie and the loonie.

EUR/AUD and EUR/CAD showed strength last week but are both bounded in recent range. Based on the relatively unclear outlook in USD/CAD and AUD/USD, we'd prefer euro against them in near-term and favor an upside breakout in EUR/AUD and EUR/CAD. Nonetheless, yen will likely remain the weakest currency in a while. The speed of yen's selloff would very much depend on the outcome of this week's BoJ meeting. But that any knee jerk reaction would likely be temporary. Hence, overall, we'd prefer to long EUR/JPY this week. In case of a post BoJ pull back, we'd treat that as an opportunity to add to long positions.

In US, the Bipartisan Policy Center said in a statement that US government will be unable to pay all of its bills as early as February 15. And it warned that "we have less time to solve this problem than many realize" and treasury will "exhaust its borrowing authority and no longer have sufficient funds to meet its obligations in full and on time at some point between February 15 and March 1." It also emphasized that it will be difficult to get beyond March 1.

The policy group predicts that a debt limit increase of $1.1T is needed to fund the government through the end of 2013. And, another $1T is needed for 2014. While the tax portion of the fiscal cliff issue was solved earlier this year, there is still much negotiation to be done between Democrats and Republicans on spending cuts and the debt ceiling. Meanwhile, US president Obama nominated White House Chief of Staff Jack Lew to replace Timothy Geithner as Treasury.

In the eurozone, 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%. Most importantly, 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." More in ECB Voted Unanimously to Leave Rates Unchanged. The euro was also lifted by a solid debt auction in Spain. Spain held its first debt sale in 2013 and sold a total of EUR 5.8b in 2015, 2018 and 2026 securities today, exceeding its maximum target of EUR 5b.

The auction showed solid demand at both the short end and the longer end with yield lower than prior auctions. The result further affirmed the government's position in not seeking a bailout in the near-term. Spain plans to raise as much as EUR 121.3b this year.

In Japan, prime minister Shinzo Abe unveiled a JPY 10.3T stimulus plan to boost recovery and end deflation. 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, it's reported that the BoJ would consider additional stimulus at its January 21-22 meeting this week, and might even double the inflation target from 1% to 2%.

The yen has been deeply sold off since the new Prime Minister Shinzo Abe's push for a 2% target. Selling intensified as the BoJ expressed it's intent to review that price goal. Also, Abe has been pushing for "bold" monetary easing to revitalize the Japanese economy and theses have been priced in the markets. While the trend in yen is still bearish, it might take something really strong from BoJ to impressive the markets to accelerate the yen's sell-off, like open-ended asset purchases, or eliminating the 0.1% interest rate floor on deposits held at BoJ by commercial banks.

China's trade surplus jumped to $31.6b in December comparing to expectation of $20.1b. Exports rose an impressive 14.1% comparing to expectation of around 5.0% increase. Imports also 6% comparing to expectation of 3.5%. For the whole year, trade surplus soared 48.1% to $231.1b with exports up 7.9% to $2.05T and imports up 4.3% to $1.82T. 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 prices jumped a strong 4.2% yoy, the highest since May. Services price jumped 2.5% yoy, fastest since October 2011.