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It was back to business as usual in the markets as the search for yield gathered momentum. The big loser was the Japanese Yen surpassing the USD as the currency of choice to sell in the thirst for yield. The recent stimulus from Japan and recent verbal attempts to weaken the currency are finally starting to undermine the Yen; USD/JPY is heading back towards 88.00 and GBP/JPY is back up at 146. The recovery trade is glaringly apparent again with equities gaining- the Nikkei up 3.3%; Gold hitting new highs and Oil gaining.

EUR/USD is still pushing north although momentum has slowed sue to the market awaiting the ECB rate decision at 12:45 today. As usual it will be the press conference following the decision that will be closely eyed. What the market will be scrutinizing is the potential for a shift in the terms that the ECB offers funding to banks on a long term basis- previously a spread of 1% was utilized. What they could look to do is raise the tender or remove it completely and leave it floating- both moves would be considered hawkish and thus euro bullish. In addition to this they could upgrade their GDP outlook which again would be a positive and bullish signal. The main focus will turn to EUR/USD and the next key level is 1.5160 and beyond this 1.5290 to really enforce the bull run. GBP/EUR has softened a little this morning, possibly due to UK PMI services data which came in weaker than expected at 56.60 down from 56.90 in October.

Yesterday the Federal Reserve beige book was released reporting on economic conditions in 12 Fed districts. The tone was slightly upbeat with moderate improvements in most areas, however credit remains tight and employment weak. The key data for the US will be tomorrow’s payroll and unemployment numbers.

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A big week in the markets last week saw the release of interest rate decisions in the UK and the Eurozone and the results of the stress testing of 19 US banks. To summarise we saw the UK add another £50 billion to its quantitative easing programme, the ECB cut rates by 0.25% and launch a programme to buy €60bn of covered bonds. In the US the results of the stress testing demanded that 10 of the largest US banks raise $74.6 bn for a worst case scenario.

The result of last weeks activity and data releases in the markets was mainly positive and encouraged more confidence within the equity markets- the result of this was a weaker USD. The USD fell to 1.36 against the Euro and 1.52 against the pound, data on Friday confirmed that non-farm payrolls fell 539,000 against an anticipated fall of 600,000 so better news than expected and another reason to sell the USD as risk appetite increased. Sterling remains pinned in a range of 1.11-1.12 against the euro as both the pound and the euro rallied against the dollar in unison.

The main gainers in the currency markets last week again were the higher yielding currencies, the AUD hit a 7 month high on the Yen…Oil traded 10% higher to $58 a barrel and gold lifted- this helped the CAD, ZAR and the NZD to gain further. After last weeks continued rally in equities we could see some profit taking today bring back strength to the dollar and the YEN and soften the higher yielders- we have already seen some evidence of this in early trading.

For the week ahead we need to focus on the trade balance data tomorrow from the UK and the US, on Wednesday we have UK unemployment data and the quarterly inflation report. In the US we see retail sales on Wednesday and CPI data on Friday- the CPI could demonstrate a very slow pace of price growth in the US and highlight the risk of deflation- a concern raised by FOMC members in their last meeting.

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