Yen Recovers On Profit Taking As BOJ Starts Meeting

The yen recovered broadly today as BoJ started its two day policy meeting. Expectation on the post meeting announcement is high considering that yen is down more than 8% against dollar since December and nearly 11% against the euro. It's generally expected that BoJ would expand the stimulus program, probably by another JPY 10T. The move would be significant in a way that it's the firs time in more than 10 years that the central bank expands easing in two consecutive meetings.

Also, in response to the new prime minister Abe's pressure, BoJ would likely double the inflation target to 2%. A joint statement would be issued with the government in stating BoJ's commitment to end deflation and bring recovery. These are well priced in the markets and as mentioned before, the BoJ needs to do more to extend the selloff in the oversold yen. Without moves like open-ended easing, or removal of deposit interest, we might see larger after-the-news rebound in yen.

Nonetheless, the overall trend in the yen would remain bearish no matter what happens tomorrow. It's been very clear that Abe would choose a dove to be the next BoJ governor after Shirakawa ends his term in April. And more aggressive easing is expected after that. The recent sell-off in yen prompted some talks that BoJ could adopt a slower pace of easing as the yen is already weak. But it's believed that USD/JPY at around 90 is still at a level that's troubling exporters. And indeed, BoJ needs to at least maintain its easing pace until USD/JPY breaks above 100. So, any post BoJ pull back in yen crosses are treated as buying opportunities for another leg up in short to medium-term.

In the eurozone, Bundesbank head and ECB governing council member Weidmann said in a paper that it's "wrong and dangerous" to assume central banks as the sole crisis manager. And he criticized that the reform conditions for ECB's OMT program is dependent on governments and is "problematic." Also, he noted that the OMT program "can bring considerable risks to the monetary policy" and should be "limited and prevented."

"Monetary policy can only buy more time. It is like a painkiller which will not erase the reasons but can cause risks and side effects," Finance ministers are having their first meeting in 2013 today in Brussels and would discuss the way the ESM could bypass governments be be channeled through directly to banks.

Latest CFTC data showed speculators turned net euro long again on January 15, to 7.3k contracts, comparing to prior week's 8.0k net shorts. Yen net shorts dropped for the fifth consecutive week to 65k. Even though the Swiss franc dropped sharply against the euro, swissy net longs rose slightly to 12.8k contracts. The sterling net long was slightly up to 28.3k. Australian dollar long rose further to 89.1k. Canadian dollar long was slightly up to 66.7k but is largely trapped in range.

On the data front, UK rightmove house prices rose 0.2% mom in January. Germany PPI and Canadian wholesale sales will be released later today.