Markets Steady As Sentiments Supported By Easing Of Basel Rules

Financial markets are steady in Asia today without much reaction to the solid employment report from US over the week. Major pairs and crosses in FX markets are stuck in right range as dollar retreats while yen recovers. Sentiments were supported by news that the Basel Committee for Banking Supervision has watered down the Basel asset rule and put back implementation. Major change is in the so called Liquidity Coverage Ratio, or LCR, which requires banks to hold liquid assets to cover all expected outflows over a 30-day period. And, the original deadline was 2015. Now, banks are only required to keep a ratio of 60% in 2015 with the full deadline pushed further to 2019. More importantly, Banks could use certain collateral to cover up to 15% of their LCR. It believed that the chance is aiming at giving banks the space to finance recovery in the global economy.

In Japan, Finance Minister Aso said over the weekend that a "formal accord" for BOJ is not necessary as long as it works and communicates with the government closely through the Council on Economic and Fiscal Policy, which was revived by Prime Minister Shinzo Abe. Economics Minister Akira Amari said "what's important is for the government and the BOJ to share a price target and show markets our determination of achieving it."

BoJ is expected to debate on raising the inflation target from 1% to 2%, the figure Abe is pushing for, in it's January 21-22 meeting. Meanwhile, it's reported that the Japanese government is preparing to announce a JPY 12T fiscal stimulus program this month, which include JPY 5-6T of public works spending.

In Europe, ECB and BoE meetings are the major focuses this week and both central banks are expected to hold their policies unchanged. In Italy, the upcoming general election in late February would be a major focus in early part of the year. The center-left coalition led by Pier Luigi Berasani is leading a three-way race with center-left coalition led by Democratic Party and former prime minister Berlusconi's People of Freedom party. Prime Minister Mario Monti resigned last December just after the approval of the 2013 budget and his bloc is at fourth with support of around 15% according to latest polls.

The latest CFTC data showed the sentiments on the euro turned sharply in December and closed 2012 on a strong note with 5.1k contracts of net longs on December 31, comparing to the lowest point of 214.4k net shorts back in June. Sterling was also strong with net longs at 36.6k, just a touch below 2012 high of 37.3k set a week ago.

Yen net shorts continued to retreat to 80.5k, comparing to 2012 high of 94.4k net shorts set in mid December. Australia dollar net longs was at 79.5k, comparing to 75.4k a week ago and 103.4k 2012 high made back in early December. The Canadian dollar net long was relatively unchanged at 65.9k, but way off 2012 high of 111.9k set in September.

On the data front, Japan monetary base rose 11.8% yoy in December. Swiss foreign currency reserves, Eurozone Sentix Investor confidence and PPI will be released in European session. Canadian Ivey PMI will be featured in US session.