Yen Sells Off , European Lower after Moody's Downgrade

The Japanese yen is sharply lower after BoJ unexpectedly expanded it's quantitative easing program today. BoJ left rates unchanged at 0-0.1% as widely expected. But, the bank unexpectedly expanded the quantitative easing problem from JPY 55T to JPY 65T. Under the program, the bank will buy government and private debt and lends funds against various types of collateral. And, the additional fund of JPY 10T would be used for purchases of long-term government bonds. In addition, BoJ will set consumer inflation target of 1%. USD/JPY jumps sharply and is back pressing 78 level after the release.

Meanwhile, European majors weakened after Moody's lowered sovereign debt ratings of six European countries. Spain was downgraded by two notches from A1 to A3. Italy was lowered by one notch from A2 to A3. Portugal was lowered by another notch Ba2 to Ba3, further into junk status. Slovakia, Slovenia and Malta were downgraded by one notch. Moody's noted that "all of these ratings remain on negative outlook given the continued uncertainty regarding financing conditions over the next few quarters and its corresponding impact on creditworthiness." In addition, France, UK and Austria's outlook on their Aaa ratings was lowered to negative.

Markets remain cautious on the Greece situation even though the parliamentary vote on austerity was passed. There are several key issues remain. Before getting approval from EU finance ministers on Wednesday, Greece need to spell out exactly how it's going to save another EUR 325b in 2012. Meanwhile, EU officials would require political leaders to commit in writing to implement the new austerity measures even after elections in April. One key point is that the New Democracy leader, Samaras, has already hinted that he will negotiate for a new package after getting the EUR 130 second bailout. And logically, that faced strong opposition from EU leaders including Merkel, who emphasized that "an amendment to the program can't and won't happen." There is still an estimated gap of EUR 15b in the plan which needs ECB's contribution in some way. While the PSI deal would help cut EUR 100b off the total EUR 350b debt pile, it's uncertain how many of the private bond holders would take part voluntarily. So, in the end, the outcome of Wednesday's EU summit could be just a conditional offer for the bailout which drags the issue further on closer to March bond redemption deadline.

Looking ahead, a number of important economic data would be released including UK CPI, German ZEW and US retail sales.