Euro Trails in Risk Rally, BOJ Decision Upcoming

This is a complete wrap-up of the European US sessionss (Spain auctions, IFO, US housing), along with a preview for Asia. NZD and AUD were the top performers while USD and JPY lagged. The BOJ decision is the highlight of the Asia-Pacific session. Latest Premium Trades are below.

The surprisingly strong IFO survey and Spanish bill auction set the stage for continued gains in US trading.

German IFO business climate improved in December to 107.2 from previous 106.6. Other components also helped to underpin riskier assets as expectations improved to 98.4 from 97.3 and current assessment remained steady at 116.7 better than expected 116. German PPI rose 5.2% in November, slightly lower compared to previous 5.3% and finally GfK consumer confidence survey remained steady at 5.6.

Another reason for the improved risk appetite came from Spain as it exceeded its target EUR 3.5-4.5 bln and sold EUR 5.64 bln worth of bills today with significantly lower yields compared to the previous auction. 6 month bill sold at 2.43% from previous 5.23% and 3 month bill sold at 1.73% compared to 5.11%. Bid to cover was solid 4.06 and 2.86 respectively. 10 year periphery-German spreads started to narrow immediately after the auction.

In other news, Swedish Riksbank cut its repo rate 25 bps to 1.75% as expected citing slowing economy and deteriorating outlook.

In the UK, December CBI retail sales bested expectations and reached the highest point since May as data improved to +9 in December from previous -19. and Canadian CPI slowed in November to 0.1% from previous 0.2% (core CPI 0.1% from 0.3%) m/m but remained steady at 2.9% (core steady at 2.1%) y/y.

The momentum picked up after US housing starts climbed to 685K (a high since April 2010) from 627K on a surge in multi-family dwellings.

The S&P 500 gained 3.0% to 1241 but it would be foolish to pin the entire gain on housing starts, especially after the House blocked legislation that would have extended payroll tax cuts. Instead, it appears as though low liquidity and year-end repositioning spurred a large portion of the rally.

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EUR/USD climbed as high as 1.3133 in early US trading but sunk back below 1.31. The declines came after a warning from Fitch about downgrades to 24 European banks on increased prospects for volatility and funding problems. Further fuelling the decline was a downgrade in the IMFs 2012 forecast to 1.0% from 1.9%.

Asia-Pacific Preview

At 2350 GMT, Japan releases trade data for November. The total trade deficit is expected at 450B yen with the adjusted merchandise deficit at -305.7B yen. The data is unlikely to drive JPY trading.

The Bank of Japan decision will be announced at roughly 0330 GMT after a two-day meeting. The BOJ continues to offer dollar funding in unlimited amounts but demand has drastically increased in the past week due to the European crisis and the year-end funding crunch. With rates at 0.10% and the central bank already engaged in a large number of QE and loan programs, the market is not expecting any substantial new programs.

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