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BOJ may keep on stimulating into 2014

The overnight Asian session started great, with investor optimism that the Bank of Japan would keep its monetary stimulus, even with the FOMC potentially starting to ease back on their own stimulus program. Trade data released recently has Japan posting a •1.29tn trade deficit for the month of November, the widest deficit since January of this year as inflated energy costs due to a weaker yen buoyed the y/o/y increase in the value of imports. A weakening yen will help support Japanís export focused economy, but it also increases the value of imported energy costs, and unless Japan can turn around its nuclear program, any further downward pressure on the yen is unlikely to materially impact the trade deficit unless global growth suddenly picks up. The Nikkei ended is session higher by 2.02%, while USDJPY makes an assault on the 103 handle midway through European trade.

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The pound was back in the spotlight again overnight, with the claimant count change for November and the unemployment rate as of October both hitting the wires. The updated employment situation follows on the heels of Governorís Carneyís speech yesterday where he advised that barring any shocks, the British economy is at a point where it is able to sustain itself without any additional stimulus. The hawkish comments on an end to any additional asset purchases were mitigated however, with Carney also adding that the recovery still had a ways to go before it would be appropriate to alter the course of monetary policy.

Bank of Englandís forward guidance shows no signs of abating, with the unemployment rate through the three months to October dropping to its lowest level since April of 2009, coming in at 7.4%. The median analyst estimate was for the jobless rate to remain steady at 7.6%, so it was not only a positive surprise for the UK labour market, but it brings the employment situation closer to the 7.0% threshold where the BoE said they would consider rising rates. The claimant count change for November also came in better than expected with an additional 36.7k people moving off the dole, and highlights the improving employment conditions are likely to continue heading into the end of the year.

At the same time, the minutes from the last Monetary Policy Committee meeting were released, however provided little in the way of surprises for the market. While the BoE did note that there has been a divergence between performances in productivity when compared to the labour market, new information was sparse as the decisions to keep the asset purchase program and interest rate unchanged were unanimous. The pound has risen into the mid-1.63 against the USD on the better employment numbers, with the FTSE up by 0.28% as we head into the North American cross.

Focusing our attention on North America, Building Permits and Housing Starts for the month of November were both released earlier this morning, including the delayed housing starts numbers from September and October. The housing numbers showed that a recovery in new homes started was witnessed in November, as we saw drop offs in each of September and October, only to have November recoup all of those losses and print just shy of 1.1M starts on an annualized basis. Permits issued during the month of November also came in stronger than forecast despite being down slightly from the previous month, managing to keep afloat north of the 1M level when compared to the last twelve months. While not a slam dunk weíll see a reduction in the pace of the Fedís balance sheet expansion because of todayís housing numbers, there is an aftershock moving through markets, as the DXY is up over a tenth of a percent, USDJPY pushes through 103, and USDCAD gives up a quick 10pts to head back into the mid-1.06s. The impending moves from the housing data is liked to be muted however, as the FOMC rate decision remains the epi-centre of market attention.

As we get set for the opening bell in North America, the FOMC rate statement, their updated economic projections, and Bernankeís last press conference as head of the FOMC are the events that everyone will be focused on throughout todayís session. With a number of different potential outcomes for how the Fed wants to position itself into the end of the year, it is likely the markets will experience elevated volatility across all asset classes once the statement hits the wires at 2:00pm EST. With the budget deal in Washington clearing its crucial procedural vote yesterday in the Senate, and the implications the agreement could have on the unemployment rate in 2014, it is likely we could see the Fed address the quality of the jobless rate improvements by dropping its forward guidance threshold from 6.5% either at todayís meeting or early in 2014. While the budget deal has potential implications for progress in the downward trajectory of the jobless rate, it by no means clears a path for a taper today, as Republicans have made it clear that a deal to raise the debt ceiling in February will bring with it new demands from the GOP, thereby scuttling any aspirations the political deadlock in Washington was a thing of the past. With a myriad of different options available to the Fed, equity hedgers have been active leading up to todayís decision, with the VIX curve inverting further (spot VIX increasing while the futures contracts sell off) as investors pay up for near-term protection. The choppy trading that will most likely take place post-release should give corporates on both sides of the market (long and short USD) attractive opportunities to transact, so make sure to speak with your dealing teams in regards to a specific strategy heading into the release.

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