As was universally predicted, the Japanese central bank held rates steady. But the real surprise was that no further easing measures were announced by the bank. Finance Minister Noda reiterated that he was monitoring the currency market but further attested that the BoJ and Japanese government should cooperate on battling deflation and strengthening the JPY.

Data from the Japanese Ministry of Finance showed a net inflow from China of ¥17.2 bn since the beginning of 2010, with over ¥5 bn in June alone. China's shift to purchasing Japanese sovereign debt en-mass is adding to the Ministry of Finance's problems in strengthening the Yen. The move should also be a massive alarm for the US treasury as the US relies heavily on Chinese funding.

We still hold that the downside to the USDJPY is limited and we're looking to build long positions on dips. The USD is actually starting to rally slightly as pundits and media articles began expressing doubt that the Fed will actually engage in further quantitative easing. As a result, the short end of the US yield curves rose but equities weakened as major market participants began squaring their short USD positions.

The USD attempted to claw its way back up during the Asian session as the Chinese data provided the market with plenty to be bearish about. China's trade surplus rose to its highest levels since Feb 2009 as export growth remained robust - 38.1% vs. 35% expected, but imports sagged unexpectedly to 22.7%, coming in much lower than the anticipated 30%. The lopsided trade data is fueling further speculation that a CNY appreciation is in the cards. At the time of writing, the Shanghai composite is down almost 3% as a result. 

For tonight's FOMC meeting and in spite of recent weak US data, we believe that members will not adjust policy nor vote for further easing. Considering that economic conditions haven't drastically shifted since June, despite the negative headlines surround the GDP or the NFP numbers, there is still decent growth. The Fed statement will unlikely address the current state of economic activity and maintain the extended period rhetoric. Further, since the Fed hasn't changed its rhetoric or given any indicators that a change in policy is on the way, any sudden adjustment in policy would undermine the central bank's credibility.

The meeting should give the US dollar a slight boost across the board. However, we cannot judge for sure whether or not the US is merely experiencing a slight slowdown (we think so) or if the economic giant is falling off the proverbial cliff until more data is released. As such, major participants will be betting that further monetary and/or fiscal stimulus is around the corner.

For those trading the Euro, EU default concerns continue to wane as risk premiums are cut across the bond markets and sovereigns spreads continue to tighten - not fireworks, but Euro positive.

Today's Key Issues (time in GMT):
06:00 EUR GER Jul CPI - final,
06:00 EUR GER Jul HICP - final,
06:00 EUR GER Jul WPI; last -
06:45 EUR FRA Jun industrial production,
08:00 NOK Jul CPI, -0.4% m/m,
08:00 NOK Jul CPI - core,
08:00 NOK Jul PPI; last
08:30 GBP Jun trade balance, -7.7 exp, -8.1 prior
12:30 USD Nonfarm productivity, 0.3 exp, 2.8 prior
12:30 USD Unit labor costs, % q/q 1.6 exp, -1.3 prior
14:00 USD Wholesale inventories, % m/m 0.5 exp/prior
18:15 USD FOMC statement on policy, interest rates 0.00-0.25 exp / prior
23:01 GBP Nationwide consumer confidence, index 63 prior