The lack of 1st tier economic data and stories that have failed to capture the market's imagination have kept FX markets in check. However, in Japan the rhetoric is really heating up, with even stronger worded comments regarding the stronger JPY and their perpetual fight against inflation, being hurled in to the market. Japanese PM Hatoyama said that the current market pricing of the yen did not represent fundamentals and might be necessary to take aggressive action against a strong JPY. And this was on top of Finance Minister and Deputy PM Kan comments, which suggested the strength of the JPY was a problem and an FX intervention was always an option. It seems like the intense political pressure is beginning to weigh on the semi-autonomous BoJ, as rumors swirl that next week's rates meeting will contain additional QE (additional JGB purchases ). The JPY has been supported by repatriation flows by Japanese corporate and deleveraging of risk correlated trades and corresponding contraption of yield. However, as the US Fed moves closer toward an exit strategy, combined with the BoJ actual implementation of QE, we believe the JPY will continue to be sold. After Wednesday's EURCHF price action, which implies SNB intervention, we correctly pulled back on our expectations for Thursday rate decision. The SNB maintained the official interest rates at 0.25% and sounded overly dovish considering the momentum in inflation (although the official forecast supported this attitude). However, interestingly the SNB came out with guns still blazing on the issue of CHF strength. The central bank stated it would act decisively to defend unwarranted CHF appreciation against the EUR. Clearly judging the EURCHF price action, the market expects it's only a matter of time before the SNB eases off the trigger and continues to sell EURCHF on rallies. We believe this is the correct strategy and expect it's only a matter of time before inflation outpaces official expectations and the SNB will swiftly run out of reasons to protect the CHF. At the time of writing EURCHF broke below 1.3600 support trading down to 1.3582...this will get interesting. In Europe, the focus will be on E16 Jan Industrial Production. With three of the largest EU economies showing strong production numbers in recent weeks, the bias is toward the upside. And with the EURUSD approaching the important 1.3735 resistance, a surprise print higher could give the single currency the boost it needs to break out of its languishing range. And in the US session, markets will be keenly watching Retail Sales and Consumer Sentiment release.
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