Daily Report: BoJ Cuts 20bps, Has Euro Topped?

The forex markets are rather steady today so far as little response is paid to BoJ's rate cut. the Bank of Japan cut the overnight lending rate from 0.3% to 0.1% on 7-1 vote and announced plan to buy corporate debts to help corporate raise funds during deepening recession. Tado Noda was the sole member to dissent. Basic loan rate was also lowered by 20bps to 0.3% by unanimous vote. Yen remains mixed after the decision. Note that firstly, more upside cannot be ruled out in EUR/JPY and CHF/JPY as supported by the theme of intervention. Secondly, USD/JPY's recovery is not convincing yet as the downtrend is still intact. Thirdly, GBP/JPY, AUD/JPY and CAD/JPY are staying in range despite all the volatility elsewhere. There is not broad based direction in the Japanese currency for the moment.

Elsewhere, Euro continues to consolidate against dollar and sterling. The pull back in the common currency is believed to be triggered by news of ECB lowering the deposit rate from 2.00% to 1.50%, 100bps below the benchmark interest rates currently at 2.50%. ECB also raised the marginal lending rate from 3.00% to 3.50%, 100bps above the benchmark rates. . Trichet said that this action is "necessary" for stabilizing the financial markets. Though, markets perceive that as a way to discourage capital inflows into Euro.

Technically speaking, firstly, dollar index drew some support from 61.8% retracement of 71.31 to 88.46 at 77.86 inside an important support zone of 78.59 to 80.38. Some stabilization is seen as expected with 4 hours MACD crossed above signal line. Further break of 80.44 resistance will confirm that a short term bottom is formed at 77.69. As mentioned before, the critical factor to determine dollar's outlook will be on whether another fall will be seen after the current rebound to make the whole fall from 88.46 a five wave impulsive sequence, or will such fall complete in three wave corrective manner. This should be decided in the next few weeks and will set the tone for 2009.

Secondly, EUR/USD and EUR/JPY has both met upside target in the rebound already and near term focus will turn back to some intraday support levels for confirmation that at least short term top is formed there. Thirdly, attention will also be paid to 1.5163 support in EUR/CHF for confirmation that it's rebound has completed at 1.5880 and thus the switching over of relative strength in the Euro and the Swissy.

On the data front, Japan's all industry index dropped 0.5% mom in October, above market expectation of -0.8% following a revised reading of -0.1% in September. In the UK, December Gfk consumer confidence unexpectedly improved to -33 from -35 as tax reduction and lower energy costs stimulated spending desires.

Looking ahead, Germany will report November PPI which is expected to have plunged 0.8% from 0% a month ago. Later at 1200GMT, Canada will report CPI for November is anticipated to moderate further to 1.8% yoy from 2.6% in October. Decline in energy prices and constrained demand brought by global economic downturn continued to drag down price levels. On monthly basis, the gauge should have contracted -0.5%.