Yen Remains Pressured After CPI And BoJ Minutes

Yen's sell-off extended further Friday after inflation data and BoJ minutes with USD/JPY and EUR/JPY took out recent highs and psychological level at 90 and 120 respectively. National CPI core dipped -0.2% yoy in December, down from November's -0.1% yoy. The reading stayed negative in seven out of the past eight months with only a 0% reading back in October.

The details were even more worrying as persistent deflation pressure was seen in always every category with the core-core measure, which excludes fresh food and energy, was down -0.6% yoy. The data raised expectation that firstly BoJ needs to raise its easing effort and a 2014 plan on open-ended asset purchase is simply not strong enough. Secondly, political pressure on aggressive BoJ easing will certainly be increased in the months ahead.

Meanwhile, the December BoJ minutes showed that a few board members "noted that it was necessary for the BOJ to demonstrate its aim to encourage a further decline in short-term interest rates -- thereby narrowing or reversing interest rate differentials between Japan and other economies -- with a view to exerting influence on foreign exchange rates." And, the members also expressed that "purchases of T-bills should be increased substantially" with one member noting that BoJ should also considering additional purchases of JGBs during the further half of 2013. There was a member proposed to lower the interest paid on excess reserves from 0.1% to 0% and cutting the fixed rate fund rate from 0.1% to 0.03% but that was voted down by other eight members.

Technically, selloff in yen is mainly centered against dollar and euro. Now that 90.24 and 120.70 in USD/JPY and EUR/JPY, further rally should be seen to 90 and 123 respectively. GBP/JPY is still limited well below 144.80 resistance and thus there might be more consolidative trading seen. Same situation was seen in AUD/JPY as it's staying well below 95 psychological level in spite of Friday's rise.

Elsewhere, the US House of Representatives approved the bill to suspend the borrowing limit by a 285-144 vote, lifting the government's borrowing limit of US$ 16.4 trillion until May 19. In Asia, investors were concerned about renewed nuclear tensions in North Korea. The country's National Defense Commission stated that a planned "high-level" atomic test and long-range rocket launches will target the US. In response, the White House said that North Korea's threat "needlessly provocative" and would only encourage further isolation and sanctions.

Looking ahead, German Ifo and UK Q4 GDP will be the major focus in European session. German Ifo is expected to show some improvements in January. UK GDP is expected to show -0.1% qoq contraction in Q4, comparing to 0.9% qoq rise. EUR/GBP remains very strong in the near-term.

Canadian CPI will be the main focus in US session. Headline CPI is expected to rise back from 0.8% yoy to 1.2% yoy while CPI core is expected to rise from 1.2% yoy to 1.5% yoy. Note that USD/CAD has taken out parity after BoC meeting last week and a strong rally is expected in the near-term.