The overnight releases of Chinese PPI and CPI failed to garner the excitement they had promised, with Asian stocks managing a mixed performance. CPI did print a 16 mth high of 2.7% y/y but at these levels the rise in inflation can still be deemed as relatively moderate (CPI hit 8.7% y/y in 2008). That said the strength of Chinese loan data suggest that inflationary risks are firmly bias to the upside and have been sufficient to trigger speculation that CPI will rise above the 3% gov't target in the months ahead and bring forward a BoC rate hike potentially into Q2 . The threat of Chinese monetary tightening pushed the JPY higher overnight in a move that was largely unwound in London hours. Speculation that the BoJ will announce addition monetary stimulus on the Mar 16 meeting continues to undermine the JPY. On first sight this morning's downward revision to Japan's Q4 GDP to +0.9% (from 1.1% q/q) enhances the pressure on the BoJ to act further. However, much of the downside revision comes from inventories. The fact that Japan's GDP is yet to benefit from a bounce in inventories is encouraging for the Japanese economic outlook. While the Japanese economy may be in recovery mode, deflation remains a threat suggesting more policy measures are likely. While USD/JPY is likely to trend higher medium-term encouraged by interest rate differentials, the near-term path of USD/JPY may be distorted by repatriated demand for yen ahead of fiscal year end.

As the yen unwound its overnight gains in London hours, 'risky' assets such as oil and the AUD unwound their falls. The AUD was hit by a disappointing employment report. However, insofar as the weakness here was in part-time employment, this report is arguably not as weak as it seems. The NZD also softened on the as expected news that the RBNZ was leaving rates on hold and an accompanying cautious policy statement. The NZ economy may not be as strong as that of Australia. However, the RBNZ reiterated the point that stimulus is likely to be removed around the middle of the year suggesting further scope for medium-term gains vs currencies such as the EUR, JPY and GBP.

Cable leapt to an intraday high of USD1.5030 this morning on the release of the BoE's Quarterly BoE inflation expectations report. Expectations of inflation rose to 2.5% y/y in a year's time compared with 2.4% y/y in November. While sterling rose on the news, insofar as this gain is far more subdued that the actual increase in inflation since Nov, it can be argued that this data is actually reassuring. While the oil and VAT factors that have driven up CPI in recent months will be temporary, the real risk for inflation is that higher inflation expectations will drive wage deals up. Today's data should help allay these fears and underpin the view that the BoE will maintain steady rates at least until the end of this year. Meanwhile cable remains vulnerable to political and deficit fears.
EUR/USD continues to hold within a range. This morning's move higher has steered clear of a break above resistance in the 1.3685 area.

The SNB policy announcement is due at 13GMT. Steady rates are widely forecast but the market will be looking for any softening in the rhetoric surrounding the risks facing the economy. While the SNB may allow EUR/CHF to continue its churn lower, it is likely to continue intervening to control the pace of any further moves. US and Canadian trade data, Canadian capacity utilisation and new housing figures in addition to US initial claims are due this afternoon. There is also a US 30 yr bond auction.
Jane Foley