Japanese Finance Minister Kan may have pared back his remarks regarding the yen but not before his stall had been clearly laid out. It is not uncommon for a newly posted official to under-estimate the power of his remarks on the fx market. Yesterday's comment from Kan suggesting he favoured a weaker yen was later watered down by his explanation that he was expressing the view of business. While Kan may adopt a more guarded approach to remarks on fx going forward his comments yesterday have offered sufficient insight to suggest that the government would be uncomfortable with renewed yen strength. While there is next to no risk of fx intervention at current levels, Kan remarks imply that the pressure on the BoJ to continue fighting the deflationary risk will continue. USD/JPY has been knocked off its overnight high on the watering down of Kan's remarks, briefly edging below the USD/JPY93.00 level this morning; but the uptrend from Nov 27 low remains in place.

EUR/USD has settled just above the 1.4300 level ahead of this afternoon's key payrolls release. The better tone of the USD yesterday already implied that the market was content to read the -84K drop in the ADP employment number as overstating weakness in the labour market. This view has been strengthened by comments from the Fed's Bullard that US unemployment is expected to drift down in 2010 and by the announcement that President Obama will issue a statement on the economy later in the day. The market median for Dec non-farm payrolls stands at zero. Given that the strength of the Nov payrolls release was instrumental in turning around the USD's fortunes last month, the USD will be very vulnerable on a sizeable downward revision to the Nov data or on a poor number for December.

Stronger than expected German Nov export orders (1.6% m/m) helped support confidence in the Eurozone recovery, although the +0.7% m/m bounce in German Nov industrial production disappointed.

Sterling has fared better this morning with cable climbing back above the GBP/USD1.600 level to an intraday high of USD1.6015 and EUR/GBP pushing down to 0.8930. Yesterday's news from the BoE that there will be no extension in QE was as expected but the recent slowing down in BoE's asset purchases is strengthening the view in the market that the BoE will next month announce a pause in its asset buying scheme; which is a positive for the pound. Also supportive is the view that sterling weakness vs the EUR has cheapened the relative position of gilt yields. This morning's stronger than expected UK Dec PPI data may be signalling an increase in inflationary pressures. However, PPI remains a long way from its 2008 peak. CPI data is still likely to be benefitted from the falls in PPI from these highs and the price sensitivity of UK consumers also suggests little room for a rise in underlying CPI in the months ahead. Overall today's PPI data should have little impact of the perception that BoE rates will remain low for a long time. Despite today's better tone sterling is likely to remain on the back foot going forward given the forthcoming election and given deficit concerns.

Canadian labour data is due in addition to the US payrolls. Obama is due to speak at 19:40GMT.

Jane Foley
Research Director