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Asian Session – Yen recovers recent losses following BoJ inaction

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The yen rallied sharply during today’s Asian, as dollar / yen’s failure to climb over 119 caused severe profit-taking after the pair’s recent rally.  The fact that the Bank of Japan also failed to deliver new stimulus contributed to yen strength.  Dollar / yen was last at 117.58, having traded as low as 117.28.

The yen’s gains accelerated after the Bank of Japan kept policy unchanged and lowered its inflation forecast for the next fiscal year starting in April to 0.6% (core rate, excluding the effect of the sales tax).  The core rate itself was forecast to come in at 1% in 2015/16, versus the October forecast of 1.7% – a sharp downward revision.  The bank remained relatively positive about GDP growth, forecasting a growth rate of 1.6% for the coming fiscal year.  The annualized growth rate during the first quarter was expected to be 2.1%.

Euro / yen was also driven sharply lower below 136 to 135.90.  Euro / dollar was little changed around 1.1570, a level it has maintained for the previous 24 hours as traders grew apprehensive of more euro selling ahead of tomorrow’s ECB meeting.  The argument was that since Germany and the Bundesbank were against QE, the final program might underwhelm expectations that have built up in recent weeks.

Following the IMF’s advice to central banks that they should maintain monetary accommodation because of weak global growth, gold rallied to above $1300 an ounce; a 5-month high.  Other commodities were under pressure however, as oil dropped to $46 a barrel once more.  The prospect of continued monetary accommodation was supportive for risk assets as Asian shares traded at a six-week high despite the global growth downward revisions.

Looking ahead, the focus will be on the UK pound, which made an 18-month low against the dollar earlier in the month at 1.5033.  Pound / dollar was last trading at 1.5163.  The two key events will be the minutes from the Bank of England’s previous meeting and the UK employment report; both released at 0930 GMT.  Unemployment is expected to come down to 5.9%, although interest rates in the UK could stay on hold throughout 2015 due to low inflation, which is taking away support from sterling.

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