Yen Steady After BOJ, Aussie Rebounds On CPI Spike

The Japanese yen remains steady in range after the BoJ left policies unchanged as widely expected. The target to expand monetary base by JPY 60T-70 T was maintained. The domestic economic assessments were left unchanged too as the BoJ saw the economy as "recovering moderately". Overseas economic outlook was upgrade as the central bank saw advanced economies "starting to recover". Latest growth and inflation projections were also released. the BoJ expects the CPI to rise by 1.3% in the 2014 fiscal year, starting this April, and by 1.9% in the following fiscal year. The inflation forecasts were unchanged form the October ones, indicating that the board is still confident in meeting the 2% inflation target within two years. The GDP is expected to grow 2.7% in the current fiscal year. 2014 fiscal year growth projection was downgraded slightly to 1.4%. 2015 fiscal year growth forecast was unchanged at 1.5%.

Australian dollar was given a strong boost by upside surprise in inflation data. CPI spiked by 0.8% qoq in Q4. Year-over-year rate was pushed up to 2.7%, up from Q3's 2.2% and beat expectation of 2.5% yoy. The RBA trimmed mean CPI accelerated to 2.6% versus expectation of 2.3% yoy. RBA weighted mean CPI also accelerated to 2.6% yoy comparing to consensus of 2.3% yoy. The 2.7% CPI rate is now quite close to the top end of RBA's 2-3% target range. And some economists noted that such inflation reading could tie RBA's hands for another rate cut. Technically, the AUD/USD has been losing downside momentum but there is not confirmation of bottoming. And as long as 0.9085 resistance holds the pair could still suffer another round of selloff.

The IMF raised global growth forecast to 3.7% in 2014, 0.1% higher from October's forecast of 3.6% as the "recovery is strengthening". US growth is projected to be 2.8% in 2014, up from October's forecast of 2.6%. However, For 2015, US growth projection was lowered by 0.4% to 3.0%. IMF expect Fed to raise policy rates in 2015. Eurozone growth is expected to growth 1.0% in 2014 and 1.4% in 2015. IMF noted 10% to 20% risk of deflation in Eurozone and urged ECB to do more to anchor expectations and sustain demand. Also, it noted that "southern Europe continues to be the more worrisome part of the world economy."

UK growth projection was significantly revised up by 0.5% to 2.4% in 2014. Growth is expected to slow back to 2.2% in 2015. IMF noted that "activity in the United Kingdom has been buoyed by easier credit conditions and increased confidence." Japan growth was raised by 0.4% point to 1.7% in 2014. China's economy is expected to grow 7.5% in 2014, upgraded by 0.3%. IMF urged china to have a "delicate balancing act" to contain escalating financial sector risks and slowing growth.

Looking ahead, BoE meetings minutes will be a major focus in European session together with job market data. That would be important to decide whether the EUR/GBP would extend its recent decline. BoC rate decision is also an important event to watch. The USD/CAD is struggling to break through the long term trend line resistance so far and how dovish BoC is would be the main factor to decide whether the USD/CAD would extend recent rally or reverse.