The BOJ has already intervened to the tune of an estimated US$35 Billion and the Japanese Yen is back to last weeks levels, JPY/USD 81.80 and EUR//JPY 115. There was also rumors that the ECB bought EUR/JPY through a French Bank but I would be a little surprised by intervention other than against the US$.Japanese equities closed almost 3% higher and European markets have opened better This will obviously not be the end of the story but I think it might be dangerous this time to back against the Central Banks and traders for sure will be wary of getting caught long of Yen. The EUR/USD seems to have established a footing at last over 1.40 currently 1.4070 and a close above the former level should see progress to the 1.4250 level. The Swiss franc which hit an all time high of 89.35 against the US dollar yesterday looks likely to bear more weight as a safe haven currency with the Yen being restrained adding to the headache for the Swiss National Bank.
Sterling has struggled to keep up with the Euro recently weakening to 87.30 this morning.
No further developments on the Nuclear power problems in Japan but if that is resolved without any more major problems then a further relief rally in Japanese stocks might be seen.
Elsewhere Bahrain may become more of a market focus and Oil is close to 2% up this morning. Other commodities too should rally eventually.
Still not sure mind you how you keep the flies out of Libya

In truth the markets were wrong to have expected any more for the time being. However, the next few months inflation readings will be key. If by the end of March we have a comprehensive Euro package and inflation is worse then I believe the ECB will change tack. They will be anxious to reestablish their credibility and focus on their one true mandate,inflation control.
On the United States side of events Fridays employment data while disappointing on the Non Farm Payroll ( NFP) of just +36000 was overshadowed by the dramatic fall in the headline unemployment rate to 9% from 9.4%. US Treasury yields raced higher and this in contrast to German yields which declined added more ammunition to the US dollar rally. However, I think any thoughts of the Fed changing tack are well premature.
Technically the US Dollar is still hanging on to the bearish trend However,if the the Dollar Index were to move above 79 ( currently 78 against a low of 76.88) then things might change. In EUR/USD terms below 1.3470 level would be damaging and 1.3300 probably capitulation.
I do believe though that the single most important factor over the coming weeks will be the emergence of details of the Euro area stability package. As Olie Rehn the President of the EU put it, ´No more phony-baloney economic union´. The German and French inspired package ( Although mainly Merkel) is intended to produce a comprehensive package to co- ordinate Wages Taxes and Pensions.
This for the peripheral EU members will if you like be their premium for a truly watertight Economic Insurance.
If this package does not materialize in such form then of course we could see a massive Euro fallout. It is for these reasons that the pressure to agree will be compelling.
There will be sticking points, most notably the Irish and their hallowed level of (12 1/2%) Corporation Tax. That will certainly be a tester for the new Government. The upshot maybe a fazed increase. If they refuse then it could give us some interesting times. Certainly the mood in Ireland is that taxpayers have bailed out their own banks to support the European banking sector.
Events in Egypt have cooled a whisker and hopefully a peaceful transition can worked out. Of course events will stay on the Forex markets radar but perhaps diminishing.
Equities hung on in again while Bonds did exactly what I think they will do.US Treasury yields have not affected the Yen thus far but may yet do so at some point.
Elsewhere,commodity currencies still looking bid and Sterling benefitting from data puts it back in the middle of its recent trading range vs. the Euro

Looking to next week there is a far less exciting economic calendar to fire up the forex markets and I suspect the markets generally will be more occupied with the technical levels. Here as recently the EUR/USD will be the focus of attention. Fridays move from the mid 1.34 level was back from the brink and not least because of the distance travelled. Anything above 1.35 will probably trigger more stops. With one Investment bank going for 1.27 after a Friday sell recommendation ( mind you with a pretty close stop at 1.35 I understand) and another talking 1.37 from earlier that is what you call a market.
Something that may attract attention is the European Finance Ministers meeting in Brussels to discuss increasing the bailout fund. Anyone banking on something for the Euro there will be disappointed. Despite Angela Merkel´s reiteration that Germany will do whatever is required to stabilize the Euro she stated yesterday that this has to come as part of a complete package. Germany seems intent on waiting until a summit of European leaders in March……..if they can I assume.
So with all this uncertainty I would shy away from any predictions this week. It is ´seat of the pants´ trading at the moment. A time to be disciplined have smaller positions unless something comes along to convince you.If we cannot break 1.35 then we could be in for a quieter week.
Outside forex land Equity markets held in there well and particularly the US markets which seem to be attracting good demand not least least from Bond Markets
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Inflation is suddenly beginning to turn a few heads.Trichet mentioned it at the ECB meeting as a short term only problem at this time. It helped an already rallying Euro but reminds us that the ECB´s mandate concerns Inflation foremost, nothing else.China too unexpectedly raised bank reserve requirements again by 1/2 % in response to inflation at 5.1%. With food prices beginning to cause unrest in some countries ( not least the catalyst in Tunisia) it is a worrying development. If I was in any extreme camp it would be stagflation not deflation as a worry.
Some of the more speculative Hedge Funds seem to be betting on the demise of China. A recently publicized one calling for minimum Investments of US$ 1million will leak 20% a year if it doesn’t materialize. There seems to be plenty of takers……..now that really is a punt. If Chinese growth did collapse then woe betide us all. Watch out AUS$ and CAN$ for sure.

Finally France´s President Sarkozy gets the prize of the week for being, well a typical politician.He said this week,¨Ireland cannot seek European aid while keeping low Corporate Tax Rates¨. On November 20th at the time of the Irish bailout it was stated Ireland would not be required to raise those tax rates. Although he hinted at it being desirable he stated, ¨That is not a demand or condition just an opinion¨.If you have any doubts how that might go down check out any Irish press you care to last week.To the Irish it is sacrosanct and would slaughter their fragile economy. Threatened with that they would rattle the Euro cage to the core. Oh no boys and girls the Euro problem is far from solved…

Next week there are bond auctions for Portugal, Spain and Italy and these will definitely be a big influence on Forex markets. Portugal as I have stated before has to take a bail out at some point and would probably do better to do it sooner than later. The real defining moment for the Euro will be how things pan out in Spain. If things go badly then I would expect to see the EUR/USD test at least 1.20. If the markets believe at some point that they will survive without forcing a crisis then it could well be a defining moment for the EURO in terms of a low .

In the short term the US Dollar strength may be a little stretched but that said much of a rebound could be hard to come by. The EUR/USD as I mentioned could take its lead from the bond auctions and a push below 1.28 is quite possible although you should get a better chance to sell it than 1.29 and bits.Economic data in the US and elsewhere continues( with the exception of Employment data) to be reasonably good while Companies are performing well as apposed to Countries, a theme that will continue.
Sterling has been pretty resilient thus far against the US Dollar and rallied to 1.2050 ( 82.95) against the Euro. While that might continue (Technically now pointing to better levels) I continue to believe that baring any major Euro crisis that these levels and better are on a medium to long term view levels where shorts will eventually pay off.

There are a few things to remember of course. Firstly the a stronger US dollar does not suit the US in terms of a stronger Economy while the weaker EURO likewise suits the Europeans. The Japanese will also have been relieved that the YEN also lost ground against the US dollar helping exporters and their Stock market. US Bond yields still look set to go higher and that will help US$/Yen.

Finally the Chinese Inflation chatter was more off than on the radar last week but could yet have a major impact on markets.

I mentioned I have spent some time in Ireland and frankly its a pretty depressed place. The outlook for the Economy is nowhere near good enough to support longer term the tough repayments they have to endure. The outlook for the housing market is still pretty dire with the prospect of foreclosures and higher rates weighing on it.I would suspect that given a referendum now they would prefer the short term shock of a Euro exit and default rather than what looks like a prolonged lingering demise. It will not happen but shows that along with Greece the current arrangements are unsustainable, there is only so much austerity that can be dished out.

The markets seem to have moved away from the real shock and awe figures and have been leaning towards the lower end with the economic statistics really not suggesting a double dip but neither too much improvements on modest growth.As far as the forex market is concerned the US dollar finished the week in the middle of its recent trading range and has potential in either direction. I feel the Fed should ere on the side of caution but they may not. I do believe if they announce a figure approaching the original number around 1 trillion dollars you should close your eyes and sell the dollar. If it were even more, then frankly sell even more when you open your eyes.

In terms of EUR/USD something close to 500 billion could help the dollar short term ( I use 1.33 as the bottom of the range still) and on the other side 1,45 remains a target.
European statistics have continued generally better but it has to be noted that it is Germany where most of the optimism exists. Last week it was employment figures which came in at a 17 year low for Germany. Further out the gap between them and the struggling Euro members will only get bigger

Sterling had a very good week prompted by 3rd Quarter GDP figures which came in at +0.8 % way above expectations. This has put talk of UK quantative easing on hold and should allow for the pound to continue supported and certainly with any dollar weakness leave 1.60 behind. Further out the cut backs announced will take its toll and I favour selling into any further strength against the Euro (short EUR/GBY mid term).

The Japanese Yen had a late surge against the dollar but I struggle to understand that one. Noticeably the Bank of Japan (BOJ) have brought forward their meeting to allow them to react very quickly to the FEDS decision.I continue to prefer the EURO against the YEN (EUR/JPY) and have not given up hope yet of a move above 120.
All in all the only surprise would therefore be a quiet week and it could be a very very volatile week. US elections, terror threats are all in the mix. Equity markets have held up thus far but their reaction to events may be the first guide to the US dollar.
If you are not an experienced trader then stay small and be disciplined or even do nothing until the dust settles
I would rather be short US$ than long going into the week as I remain bearish on a medium to long view.