The European Central Bank meets tomorrow, and that is the main event of the week.  The price action today is dominated by other central banks.  The market is still struggling to find a new balance after the Swiss National Bank’s surprising move last week.  
 
The franc remains volatile against both the dollar and euro.   The franc has gained 1.3% against the dollar and is the strongest currency today.  The fact that its balance sheet is 80% of GDP, at least three times the proportionate size of the Fed and BOE’s balance sheet and the deeper negative rates are not discouraging new buying–assuming any shorts have been forced out. 
 
The focus today, however, is on other central banks.    The yen is the second strongest of the majors, gaining almost 1%.   The dollar’s recovery from last week’s JPY115.85 low ran out of steam at the 20-day moving average just below JPY119.0, which also coincides with a 61.8% retracement of the dollar’s decline from the JPY120.75 high seen on January 2.  
 
The take away from the BOJ meeting is not going to rush into any strong action to offset the inflationary impact of falling energy prices.  It did extend two lending facilities, but BOJ Kuroda denied intentions to cut the deposit rate, which we had thought was possible.  As expected, the BOJ cuts its forecast for CPI in the FY15 to 1% from the 1.7% forecast in October.  Optimistically it would appear, the BOJ revised up growth to 2.1% from 1.5% FY15 and to 1.6% from 1.2% in FY16.   Interestingly, the BOJ’s forecast is based on oil prices rising from $55 to $70 a barrel by the end of FY16.  
 
Sterling is the weakest of the major currencies.  It fell a cent from its high near $1.5180 in response to the somewhat unexpected news that the two hawks on the MPC capitulated.  The BOE’s decision to keep rates on hold earlier this month was a unanimous decision (9-0).   In the middle of last month, one of the hawks Weale, reiterated his stance that a rate hike was needed.   
 
The December short-sterling futures contract rallied on the news but not before falling to its lowest level (highest implied yield) since January 9.  Just as sterling has held above the recent lows (~$1.5035-60), so too did the rally in the short-sterling futures stall in front of the recent highs.  
 
UK employment figures were reported at the same time as the MPC minutes.  The data were largely in line with expectations.  The claimant count fell by 29.7k, matching the revised November figures.  The ILO unemployment rate slipped to 5.8% from 6.0%, which was a bit more.  Average weekly earnings continue to recover.  In the 3-months through November (year-over-year) they rose 1.7% up from 1.4% pace seen in the 3-months through October.    Recall they had bottomed at -0.1% last June.  This coupled with the decline in inflation is seen as boosting the purchasing power of households.  This is true even though the December retail sales to be reported on Friday, is likely to pullback after a heady 1.6% rise in November.  
 
The other central bank that is very much in focus today is the Bank of Canada.   The US dollar is consolidating the sharp gains scored yesterday against the Loonie after the weakness in manufacturing sales (November’s 1.4% decline was twice the decline expected and the October series decline of 0.6% was nearly doubled in the revision to -1.1%), casts doubt on GDP.  The disappointing data underscored expectations for a dovish leaning central bank today.  The BOC won’t cut interest rates, but in the monetary policy statement, it is expected to cut its growth forecasts, and may even suggest that a weaker Canadian dollar is part of the adjustment process. Note that Canada reports retail sales and its latest CPI figures on Friday.  Headline inflation is expected to ease (1.6% from 2.0%, but the year-over-year pace of core CPI is expected to tick up to 2.3% from 2.1%). 
 
The US dollar rose to a new 5.5 year high yesterday of roughly CAD1.2115.  In our weekly technical note, we suggested potential this week toward CAD1.2150.  This still seems reasonable.  We note that this roughly corresponds to the top of the Bollinger Band.  On a medium-term view, given the divergence of economic performance and policy trajectory, we look for the US dollar to trend toward CAD1.2625, a technical retracement target, on its way to CAD1.30, the high from 2008-2009. 
 
December US housing starts and permits is the main US economic release of the day.  Starts and permits are expected to have bounced back after declines in November.  Even in the best of times, this time series typically does not move the market.  This seems especially true ahead tomorrow’s ECB meeting.