Japanese yen is sold off sharply today after S&P surprised the markets by cutting Japan's AA sovereign debt rating for the first time since 2002. After the cut, Japan's rating is now at AA-, the fourth highest level alongside with China. S&P said in a statement that Japan's government debt ratios -- already among the highest for rated sovereigns -- will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Meanwhile, S&P said that the government lacks a coherent strategy to address these negative aspects of the country's debt dynamics.

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Responding to the downgrade, finance minister Yoshihiko Noda declined to comment directly by stressed that fiscal discipline will be maintained..... to maintain markets' trust. Economy and fiscal policy minister Kaoru Yosano said the downgrade was regrettable and said the commitment to fiscal reform had not been fully understood. The Japanese yen is particularly weak against European majors after the news. USD/JPY does recover but is capped by 83 level so far.

Dollar also edges lower in early US session after poor data from US. Headline durable goods orders unexpectedly dropped -2.5% in December versus expectation of 1.5% rise. Ex-transport orders rose less than expected by 0.5%. Initial jobless claims jumped back to 454k.

width=272Australian dollar also spikes lower today after the government expressed the interest to hike taxes for funding the flood rebuilding costs. Prime Minister Julia Gillard said she'd like to raise AUD 1.8b from taxes to pay part of the AUD 5.6 reconstruction bill after the Queensland flood. Economists said the tax hike will put strain on household disposable incomes. Nevertheless, there is no change in the view that tightening cycle, while being delayed, will resume later this year.

ECB Executive Board member Lorenzo Bini Smaghi said today that a permanent and repeated increase in the prices of imported products will tend to impact on inflation in the advanced countries, including the euro area. Smaghi urged that such phenomenon can no longer be ignored. This followed the comments from ECB President Trichet on the bank's determination to fight inflation, which breached ECB's target of 2% for the first time in more than two years last month.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.3661; (P) 1.3692 (R1) 1.3742; More.

EUR/USD's rally extends further to as high as 1.3757 in early US session. At this point, intraday bias remains on the upside with 1.3539 minor support intact and further rise should be seen to 1.3785 resistance first. Break will target a retest on 1.4281 key resistance next. On the downside, below 1.3539 minor support will turn intraday bias neutral and bring consolidations. But retreat should be contained above 1.3245 support and bring another rally.

In the bigger picture, main question remains on whether medium term correction from 1.6039 has finished with three waves down to 1.1875. The firm break above 1.35 psychological level again affirm the case that fall from 1.4281 was merely a correction only and whole rise from 1.1875 is still in progress. Also, note that break of 1.4281 will revive the case that medium term correction from 1.6039 was completed with three waves down to 1.1875 and the long term up trend might be resuming. On the downside, though, below 1.2873 will turn focus back to 1.1875 low.

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Economic Indicators Update

GMTCcyEventsActualConsensusPreviousRevised
20:00NZDRBNZ Rate Decision3.00%3.00%3.00% 
23:30AUDWestpac Leading Index M/M Nov0.00%--0.30% 
23:50JPYTrade Balance (JPY) Dec0.71T0.53T0.43T0.54T
10:00EUREurozone Consumer Confidence Jan-11.2-11.1-11 
10:00EUREurozone Economic Confidence Jan106.5106.7106.2106.6
10:00EUREurozone Services Confidence Jan9.2109.810
10:00EUREurozone Industrial Confidence Jan64.545
11:00GBPCBI Reported Sales Jan37--56 
13:30USDDurable Goods Orders Dec-2.50%1.50%-1.30% 
13:30USDDurables Ex Transportation Dec0.50%0.90%2.40% 
13:30USDInitial Jobless Claims454K410K404K403K
15:00USDPending Home Sales M/M Dec 1.00%3.50% 
15:30USDNatural Gas Storage -121B-243B

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