Yen Selloff Extends after Recording First Annual Trade Deficit in Since 1980

The Japanese Yen's sell off continues today after the country unexpectedly reported deficit of JPY -0.57T in December. More importantly, Japan posted its first annual trade deficit since 1980, that is, over 30 years. In 2011, deficit was at JPY 2.49T after 2.7% decline in export to JPY 65.55T. On the other hand, import surged 12.0%. That's a result of yen's strength which erode Japan's export competitiveness. BoJ governor Shirakawa said yesterday that trade deficit is not a pattern and he doesn't expect current account balance to turn to deficit in the near future. However, there are some concerns that the current account balance would eventually turn into deficit should trade deficit continues to widen on slowing global demand and strong competition. Some economists expect that to happen at around 2016/17. And when that happens, Japan would no longer be able to pay the cost of it's public debt.

In its quarterly updates, IMF lowered global growth forecast in 2012 to 3.25%, down from 4% as projected in September. It warned that the global economy would experience an even deeper downturn as the sovereign debt crisis in Eurozone entered a "perilous new phase" requires strong actions. Exceptionally high funding costs for some Eurozone countries, thin credit in financial markets and government austerity would likely drag Eurozone first into recession. IMF expects Eurozone to contract -0.5% this year. Advanced economies including US, UK, Japan and Eurozone are expected to expand only around 1.5% through 2013.

Risk appetite regains some ground after Apple Inc's earning results blew past expectation. Though, strength in risk buying is limited on uncertainty in Greece. Greek finance minister Venizelos emphasized that the debt-swap negotiation with private credits are entering the "final stretch". But EU has clearly rejected the so called "maximum" offer by IIF. IIF chief Dallara said he's still hopeful of finding "common ground" on the deal. He urged "all parties" to contribute to the solution and emphasized that private bond holders "are wiping of the face of the earth 100 billion euros of claims against Greece. It's reported that IIF's proposal would lead to nearly 70% loss in Greek bond values with yield of the new 30 year bond at 4.25%. However, EU are pushing for yield at 3.5% until 2020 and below 4% over the 30 years period.

Australian dollar strengthened today on risk appetite and also helped by mixed inflation data. headline CPI did moderated to 3.1% yoy in Q4. However, RBA's weight median CPI was unchanged at 2.6% yoy versus expectation of 2.4% yoy. Trimmed mean CPI even accelerated to 2.6% yoy versus expectation of 2.4% yoy. The stronger than expected core inflation reading is now above the mid-point of RBA's target range of 2-3% and markets are now pricing in only around 50% chance RBA would cut again in February.

Looking ahead, it's an extremely busy day today. German Ifo and UK Q4 GDP advanced are the main feature in European session, along with BoE minutes. From US, pending home sales and house price index will be featured. Fed will keep rates unchanged today and leave the quantitative program unchanged too. But more importantly Fed will start to offer two charts with forecasts for benchmark interest rate today.