The Euro corrected higher against the US Dollar, retaking the 1.27 level overnight after heavy selling pressure pushed prices down over 2% from an intraday high just below 1.30. Germany’s IFO survey of business confidence tops the economic calendar in European hours. Key Overnight Developments • BOJ Meeting Minutes Reinforce Negative Yen Outlook • Australian Imports Drop 8% in January, Most in Over 3 Years Critical Levels The Euro corrected to retake the 1.27 level overnight after heavy selling pressure pushed the pair to tumble over 2% from an intraday high at 1.2992. The British Pound followed suit, adding 0.6% against the greenback to retrace more than half of yesterday’s downswing from 1.4662 to as low as 1.4453. Technical positioning favors a bearish outlook on EURUSD and GBPUSD. Minutes from the last meeting of the Bank of Japan revealed that policymakers were not unanimous in approving the plan to buy corporate bonds in an effort to keep funding accessible for Japanese companies. Board member Miyako Suda said policymakers had overreached, noting conditions were “not so severe” as to justify the action. With interest rates at “extremely low levels” of just 0.10%, supporters of the plan have argued that there is a need for “exceptional measures” to check the economy’s slide into the deepest recession since the 1970s. On balance, the minutes offered little actionable information on the Japanese Yen except to once again highlight the dire economic state of the world’s second-largest economy that has begun to force a breakdown of the previously iron-clad correlation between the currency and risk sentiment. Meanwhile, preliminary estimates showed Australian imports shed -8.0% in January, the largest drop at least since November 2005. Falling consumer confidence and a rising unemployment rate have weighed on spending and trimmed demand for foreign-made goods. Westpac’s leading economic index said the Australian economy will shrink at a rate of -1.2% in the first half of 2009, suggesting the antipodean nation is on pace to see its first recession since 1991. Germany’s IFO Survey of business confidence is likely to see a slight improvement in expectations for the economy’s performance in the next six months. Forecasts call for a print at 81.1 in February, extending last month’s rebound from the record at 76.9 recorded in December. The improvement in sentiment is being supported by the government’s plan to commit 80 billion euros (1.6% of annual output) in tax cuts and infrastructure investment to boost the economy as well as the prospect of further interest rate cuts from the European Central Bank. Importantly, the improvement in sentiment may be short-lived if Germany follows through on last week’s promises to support other Euro Zone members if they run into solvency problems. Although the ECB has pointed out that the regional bloc has a “no bail-out” clause aimed at preventing direct aid from one member country to another to encourage fiscal discipline, there is an article in the founding EU treaty that allows for a country facing "exceptional occurrences beyond its control". Finance minister Peer Steinbruck’s pledge not to “remain inactive” if countries like Ireland and Spain fail to meet their obligations could commit a large amount of German taxpayers’ funds beyond the nation’s borders, trimming the scope for additional fiscal stimulus at home should such the downturn extend longer than policymakers expect. As it stands, the economy is expected to shrink -1.9% through 2009 and return to a modicum of positive growth in 2010. Separately, December’s Euro Zone Current Account may see the headline monthly deficit narrow from the preceding month. We saw last week that the shortfall in the trade portion of the report was substantially less than economists expected because the drop in imports (-3.9%) outstripped the decline in exports (-0.9%) as unemployment rose to a 2-year high of 8% to weigh on consumer spending and discourage consumption, including that of foreign-made products. The capital side of the equation could also prove to be supportive as the Euro surged 9.3% while stocks added an average of 0.2% across EZ exchanges. On balance, although the trade gap didn’t widen by as much as was expected in December, the deficit still widened to an all-time record of -32.1 billion euro. Meanwhile, the US trade gap has considerably narrowed, with December result showing the smallest monthly shortfall in nearly 5 years. From a long-term perspective, this implies a net outflow of money from the regional bloc and into the States, making for structural downward pressure on the EURUSD exchange rate. In Switzerland, January’s UBS Consumption Indicator is set for release. The metric will be closely watched as traders look for follow-through to December’s impressive 3.6% jump in Retail Sales as inflation has come to a near-standstill, boosting Swiss consumers’ purchasing power. Risks remain on the downside considering unemployment has risen to a 2-year high of 3.3% and will weigh on disposable incomes as well as prompt precautionary saving. Further, the fallout in price growth will work against consumption if inflation turns negative (a reasonable proposition considering CPI printed at just 0.1% in January), for if consumers expect prices to fall in the future they will perpetually put off purchases to get the best possible deal, putting the brakes on spending altogether.

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