Forex Markets Mixed, Focus On German ZEW

The FX markets are currently quite mixed. There was no follow through JPY selling since earlier selloff this week, and major yen crosses are bounded in consolidation range. The euro is also sitting in tight range around 1.33 against dollar for the moment, while the Sterling is generally soft. The USD/CAD pair jumped to a seven month high of weakness in the Canadian dollar. The New Zealand dollar was mildly softer in the Asian session but the Aussie recovered mildly in tight range. We maintain our view to long USD/CAD. While we're still bullish about the USD/JPY; the consolidation from 94.45 might extend for a day or two and we'd prefer to go long on a dip to below 93. As for today, the German ZEW will be released in the European session and is expected to show improvement in economic sentiments. Data for Canadian international securities, transactions, wholesale sales and US NAHB housing market index will be released in the US session.

In a speech at the European Parliament yesterday, ECB President Draghi addressed the competitive depreciation of foreign exchange rates. He stated that .. most of the exchange rate movements that we have seen were not explicitly targeted, they were the result of domestic macroeconomic policies meant to boost the economy. In this sense, I find really excessive any language referring to currency wars. He believed that both the nominal and real exchange of the euro has remained around its long-term average. Concerning the economic prospect, Draghi forecast that "economic weakness in the early part of 2013 is expected to be followed by a very gradual recovery later in the year" but he warned that "considerable further efforts are needed to ensure that Europe continues emerging from the crisis."

The BOJ's minutes for the January meeting indicated that a few members were reserved about the upgrades to the Japanese economic outlook. Meanwhile, two BOJ members expressed that extending the maturity of BOJ bond buys was an option. The minutes were overshadowed by comments from policymakers. Japanese Finance Minister Taro Aso stated that the government has no plan to buy foreign bonds. His comments contradicted with Prime Minister Shinzo Abe who reiterated that buying foreign bonds "exists as one idea". The next focus is the upcoming BOJ governor. News headlines stated that Toshiro Muto, a less dovish candidate than Haruhiko Kuroda or Kazumasa Iwata, is the leading candidate for the post. Abe stressed that he expects the governor to reflect the government's determination to beat deflation. Abe stated that "it would be necessary to proceed with revising the BOJ law if the central banks cannot produce results under its own mandate".

The RBA minutes released in the Asian session unveiled that recent rate cuts have shown effects in boosting the economy while benign inflation might trigger further rate easing. Regarding developments in China and Japan, the minutes stated that ... a wide range of indicators showed that growth in the Chinese economy had stabilized, underpinned by public spending and somewhat stimulatory financial policies... there had also been indicators of stronger growth of domestic demand ... in East Asia with the exception of Japan.