Yen Firm As Recovery Continues, Aussie Lower On CPI

Yen remains firm in Asian session today as post BoJ recovery continues. It's clear that investors are dissatisfied with BoJ's lack of action this year while it only planned the open-ended asset purchase next year. This is also reflected in Nikkei's fall of over -140 pts today. Nonetheless, the profit taking triggered pull back in Japanese stocks and recovery in yen are both expected to be limited.

A key fact to consider is that BoJ governor Shirakawa is going to end his term in April. Prime minister Abe is expected to choose a policy dove to succeed Shirakawa and help him implement his Abenomics. If Shirakawa would be there for another year of two, the pull back would be much deeper. But for now, it should just be mild as markets will quickly reposition themselves into policy easing again after locking in current profits.

Aussie is the relatively bigger mover today after CPI data disappoints. CPI rose 0.2% qoq, 2.2% yoy in Q4 versus expectation of 0.4% qoq, 2.4% yoy. Treasurer Wayne Swan said the CPI result was "further evidence that there has been no significant broad-based increase in consumer prices as a result of the carbon price."

The aussie weakens in Asian session today as the data should give RBA room for further rate cut if necessary. So far, interest rate swaps are pricing in less than 50% chance for RBA to cut another 25bps to record low of 2.75% in February. But after all, another 25bps cut is still generally expected within the next 12 months.

In Europe, ECB president Draghi said yesterday that "the darkest clouds over the euro area subsided" on "resolute actions by euro area governments and European institutions". Draghi hailed that "countries renewed their commitment to reforms" and noted that Eurozone began 2013 on a "more confident note precisely because significant progress was made during 2012."

Draghi urged Eurozone leaders to have "continued ambition" to "fix the structural flaws in the governance framework of the euro area." ECB's OMT bond-buying program has yet to be activated and focus has so far been on Spain. However, European Economics Commissioner Rehn said that OMT could indeed pave the way for "market financing for Ireland or indeed for Portugal" when the exit the bailout program.

In UK, it's reported that prime minister Cameron will announce a national referendum by 2017 on whether the country should remain in EU, if his party wins the next election. Cameron will note in his speech that disillusionment with the EU is "at an all-time high". After next general election in 2015, Cameron will renegotiate the relationship with EU and he noted there should be a simple "in-out referendum" after the new settlement. Though, he will caution against immediate referendum "before we have had a chance to put the relationship right.

Looking ahead, BoE meeting minutes and UK job data will be the major focus in European session. Swiss will release ZEW expectations too. BoC will announce rate decision today and is expected to leave rates unchanged at 1.00%. US will release house price index.