At the end of last week sentiment remained buoyed by some stronger than expected trade data out of China. China, the second largest world economy, reported a trade surplus of $31.62 billion and a year-on-year increase of 14.1 per cent for December. Both figures were noticeably stronger than consensus and previous forecasts; and they continue to build optimism on other stronger PMI readings for the manufacturing and services sector released recently from China as well.

Comments by Minister Akira Amari helped the yen consolidate and recover some of the losses made- Rudolf Muscat

Despite this data, however, the limelight went to the European and British central banks that held their respective policy meetings and were also scheduled to announce the outcome of these meetings Thursday last week.

From the ECB, speaking at the news conference following the Governing Council meeting, Draghi gave no indication that policymakers would slash rates in the near future and the ECB left rates at 0.75 per cent.

The decision to stay on hold might have disappointed some speculators that were anticipating that the ECB would cut rates further to boost the economy. This speculation comes on the back of a number of economic data that keep suggesting growth remains anaemic in the eurozone.

European Central Bank President Mario Draghi also continued to say that the bloc will slowly recover this year as bond markets in the region calm, following three years of disarray. Finally these announcements sent the euro soaring at the end of last week, the EUR/USD rose to 1.3272 on the day, following a Thursday open at 1.3039.

Since then, EUR/USD has challenged 1.34 levels when hitting highs of 1.3403 at the start of this week – highs last seen in February 2012.

On the same day late last week, the Bank of England kept its interest rates and its asset purchases target unchanged at 0.50 per cent and £375 billion respectively.

From the US, Fed chairman Ben Bernanke speaking from Michigan last Monday made it clear that the fiscal deal at year start was not a comprehensive solution and that the US “was not out of the woods yet”. Bernanke made reference to the upcoming debt ceiling, and the sequester that the US will have to resolve in the coming weeks.

The Japanese yen tumbled to more than a two-and-a-half-year low on Friday when seen against the US dollar; and to lows last seen in May 2011 against the euro. The yen continued to crumble when Prime Minister Shinzo Abe called on the Bank of Japan to consider maximising employment as a policy goal. Abe renewed pressure on the central bank by calling them to pursue a dual mandate, similar to that of the US Federal Reserve, which could make the BOJ undertake more aggressive policy making.

On Friday, Japan’s Cabinet approved an economic stimulus package confirming the new government’s commitment to spur growth and fight deflation. The yen also came under pressure after data showed Japan posted a current account deficit for the first time in 10 months. At the time of writing the USD/JPY is just short of 90.00 levels, levels last seen in June 2010. The yen has also been weaker across the rest of the majors. The EUR/JPY is also making fresh highs as the JPY weakens; the currency pair has made highs of 120.12 in the former part of this week.

Last Tuesday however, comments from Economy Minister Akari Amari helped the JPY consolidate and recover some of the losses made since late last week. Minister Amari seemed to imply that the yen had weakened enough, as he outlined that an excessively weak currency may leave undesired effects on imports and households.

The yen was not the only currency marking a trend, another currency perceived to be a safe shelter in times of uncertainty, the CHF, also gave in to selling pressure.

Confined to an unimpressive performance since September 2011, when the SNB pledged to maintain a 1.20 floor for the EUR/CHF, the currency pair has finally distanced itself significantly from the floor as it breached 1.24 levels earlier this week – maybe marking a game changer in risk trends?

Upcoming FX key events
Today: ECB monthly report, US housing starts and Philadelphia Fed index.
Tomorrow: UK retail sales and US Michigan Consumer Sentiment index.

Technical key points
EUR/USD is bullish, target 1.3500, key reversal point 1.2870.
EUR/GBP is bullish target 0.8370, key reversal point 0.80.
USD/JPY is bullish, target 92.50, key reversal point 82.00.
GBP/USD is bullish, target 1.6600, key reversal point 1.5800.
USD/CHF is bearish, target 0.8900, key reversal point 0.9500.
AUD/USD is neutral.
NZD/USD is neutral.

trading@rtfx.com.

RTFX Ltd is licensed to conduct investment services business by the Malta Financial Services Authority. This information does not constitute an offer or solicitation and is provided for information purposes only. This information shall not be deemed to constitute advice and should not be relied on as such to enter into a transaction or for any investment decision. Any opinions expressed in this document represent the views of RTFX at the time of preparation. They are subject to change without notice. RTFX believes that the information contained herein is accurate as at the date of publication. No warranty of accuracy is given by RTFX and no liability in respect of any errors or omissions, including any third party liability, are accepted by RTFX or any director, officer or employee.

Rudolf Muscat is a senior trader at RTFX Ltd.

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