At the Monetary Policy Meeting held today, the Policy Board of the Bank of Japan decided upon the following.

(1) Yield curve control

The Bank decided, by a 7-2 majority vote, to set the following guideline for market operations for the intermeeting period. [Note 1]

The short-term policy interest rate:

The Bank will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank.

The long-term interest rate:

The Bank will purchase Japanese government bonds (JGBs) so that 10-year JGB yields will remain at around zero percent. With regard to the amount of JGBs to be purchased, the Bank will conduct purchases at more or less the current pace -- an annual pace of increase in the amount outstanding of its JGB holdings of about 80 trillion yen -- aiming to achieve the target level of the long-term interest rate specified by the guideline.

(2) Guidelines for asset purchases

With regard to asset purchases other than JGB purchases, the Bank decided, by a 7-2 majority vote, to set the following guidelines. [Note 2]

a) The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.

b) As for CP and corporate bonds, the Bank will maintain their amounts outstanding at about 2.2 trillion yen and about 3.2 trillion yen, respectively.

2. The Policy Board also decided, by a unanimous vote, to extend by one year the deadlines for new applications for such measures as the Fund-Provisioning Measure to Stimulate Bank Lending, the Fund-Provisioning Measure to Support Strengthening the Foundations for Economic Growth, and the Funds-Supplying Operation to Support Financial Institutions in Disaster Areas affected by the Great East Japan Earthquake and by the Kumamoto Earthquake.

Full release

The Canadian economy expanded by 0.4% in November. This was more than enough to offset the prior month's upwardly revised 0.2% contraction (initially reported as -0.3%).

The goods-producing industries came back to life, expanding 0.9% during the month, led by mining and quarrying (+1.4%), manufacturing (+1.4%), and construction (+1.1%), all of which rebounded from their October contractions. Within the manufacturing sector, gains were fairly widespread, with output rising by more than 3% on the month in a number of industries, including electrical equipment, chemicals, petroleum and coal products, and machinery manufacturing. Transportation equipment manufacturing fell for a third consecutive month (-0.6%), with the 'miscellaneous' category leading the way lower (-5.4%).

On the service-producing side of the economy, it was a generally positive story, as output rose 0.2% in November. Leading the way was finance and insurance (+1.5%; its largest gain in nearly two years), while healthy gains were also recorded in the retail trade (+0.7%), management (+0.4%), and transportation (+0.4%) sectors.

Key Implications

Canadians were busy in November, resulting in one of the healthiest monthly GDP reports in recent memory. Gains were fairly widespread, with manufacturing nearly reversing the previous month's losses, while the service side of the economy saw continued growth (although historic revisions undid what was shaping up to be a 15 month expansion streak). The healthy November GDP figures add to the evidence that the Canadian economy continues to shake off some of the setbacks earlier in the year.

For the Bank of Canada, the November GDP figures are not likely to move the needle very much. Growth in the fourth quarter of 2016 is likely to come in ahead of the Bank's expectations of 1.5%, but a significant amount of economic slack will nevertheless remain. As such, the Bank of Canada will probably be happy to leave its policy interest rate at 0.50% well into the future, helping to support the ongoing absorption of the remaining slack.

• The increase in November GDP was stronger than the 0.3% expected going into the report and followed a smaller October decline of 0.2%, which was previously reported as down 0.3%.

The reversal of the October weakness in November was most evident in the goods-producing industries where activity rose 0.9% that almost fully reversed the 1.0% drop in October. This strengthening pattern was evident in most of the key subsectors including: manufacturing (up 1.4% after dropping 1.7% October), construction (1.1% versus –0.6%) and mining (1.4% versus –0.5%). One area breaking with this pattern was utilities where unseasonably warm winter temperatures contributed to output dropping 3.0% in November after a 1.9% decline in October.

Output in service-producing sectors rose 0.2% after a 0.1% gain in October. The month saw strong gains in retail trade, which rose 0.7% thus matching October's strong increase, and finance and insurance, which jumped 1.5% that more than reversed declines over the three previous months. Statistics Canada attributed this largest increase since December 2014 in finance and insurance to "higher investment revenues."

Our Take:

Today's data bode well for overall Q4 GDP growth to remain in positive territory pointing to a gain of 1.8% which is up from our previously-estimated 1.5%. Though this increase would still be down from the 3.5% increase recorded in Q3 that increase was temporarily buoyed by oil sands production rebounding from wildfire-related shutdowns in Q2 that sent GDP growth into negative territory declining 1.3%. Q4 growth is expected to be restrained by a major drawdown in inventories that look likely to subtract almost 4 percentage points from the growth rate though this will be offset by solid consumer spending and strengthening net exports. An expected return to inventory accumulation in the current quarter and continued strong household spending bodes well for positive growth to continue at an above-potential rate going forward. Our current forecast has Q1 growth of 1.9%. This will be below the Bank of Canada's latest forecasted increase of 2.5% though it will be sufficiently strong to put downward pressure on the unemployment rate. The prospect of tightening labour markets is expected to keep the Bank of Canada on the sidelines maintaining the current 0.50% overnight rate. Expected sustained above-potential growth going forward will eventually return the Bank of Canada to tightening mode though such is not expected until 2018.

Euro surges broadly today on much stronger than expected inflation reading. Flash CPI rose 1.8% yoy in January, up from prior month's 1.1% yoy, and beat expectation of 1.5% yoy. That's also the highest reading since February 2013. Core CPI, on the other hand, was unchanged at 0.9% yoy, in line with consensus. Eurozone Q4 GDP showed 0.5% qoq growth, up from 0.3% qoq, beat expectation of 0.4% qoq. Eurozone unemployment rate also dropped to 9.6% in December, better than expectation of being unchanged at 9.8%. That's also the lowest level since mid-2009.

The set of solid data, in particular headline inflation, add to fuels of talk of stimulus exit by ECB. The headline CPI is now close to ECB's target or 2% even though core inflation remained sluggish. ECB hawk have already be pushing the end of its asset purchase program, including executive board member Sabine Lautenschlaeger and Bundesbank president Jens Weidmann. And, governing council member Ewald Nowotny also said earlier this week that ECB would get more information to review the quantitative easing program later this summer.

Elsewhere from Europe, German retail sales dropped -0.9% mom in December versus expectation of 0.6% mom. German unemployment dropped -26k in January versus expectation of -5k. German unemployment rate dropped to 5.9% in January. French GDP grew 0.4% qoq in Q4, met expectation, up from prior quarter's 0.2% qoq. UK Gfk consumer sentiment improved to -5 in January. UK mortgage approvals rose to 68k in December. M4 money supply dropped -0.5% mom in December.

Released in US session, Canada GDP rose 0.4% mom in November, above expectation of 0.3% mom. Canada IPPI rose 0.6% mom in December while RMPI rose 6.5% mom. From US, employment cost index rose 0.5% in Q4. S&P Case Shiller 20 cities house price rose 5.3% yoy in November.

BoJ left monetary policies unchanged as widely expected. Short term interest rates was held at -0.10%. The target of annual asset purchase was kept at JPY 80T under the yield curve control framework. The central bank warned in the quarterly forecast report that "risks to both economic activity and prices are skewed to the downside". While it noted that "The momentum for achieving our 2 percent inflation target is maintained", BoJ also sounded cautious and said it "lacks strength". BoJ expects inflation to hit 2% target by around March 2019, unchanged from November projections.

A bunch of data is also released from Japan today. Household spending dropped -0.3% mom in December, above expectation of -0.8% yoy. Industrial production rose 0.5% mom in December, above expectation of 0.3% mom. Unemployment rate was unchanged at 3.1% in December. Housing starts rose 3.9% yoy in December, below expectation of 7.4% yoy. Also from Asia Pacific, Australia NAB business confidence was unchanged at 6 in December.

EUR/USD Mid-Day Outlook

Daily Pivots: (S1) 1.0630; (P) 1.0685 (R1) 1.0751; More.....

EUR/USD recovers today but stays below 1.0774. Intraday bias stays neutral first. No change in the outlook that choppy rise from 1.0339 is seen as a corrective move. On the upside, above 1.0774 will extend the rise but upside should be limited by 1.0872 resistance. On the downside, break of 1.0588 will indicate that such rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

Economic Indicators Update

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Daily Pivots: (S1) 114.50; (P) 114.94; (R1) 115.48; More...

Intraday bias in USD/JPY remains neutral as range trading continues. No change in the view that choppy decline from 118.65 is seen as a correction. On the upside, break of 115.61 resistance will suggest that the correction is finished and turn bias to the upside for 118.65. Break will resume whole rise from 98.97 and target 125.85 key resistance. On the downside, below 112.51 will extend such decline but downside should be contained by 38.2% retracement of 98.97 to 118.65 at 111.13 and bring rebound.

In the bigger picture, price actions from 125.85 high are seen as a corrective pattern. The impulsive structure of the rise from 98.97 suggests that the correction is completed and larger up trend is resuming. Decisive break of 125.85 will confirm and target 61.8% projection of 75.56 to 125.85 from 98.97 at 130.04 and then 135.20 long term resistance. Rejection from 125.85 and below will extend the consolidation with another falling leg before up trend resumption.

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Daily Pivots: (S1) 1.0630; (P) 1.0685 (R1) 1.0751; More.....

EUR/USD recovers today but stays below 1.0774. Intraday bias stays neutral first. No change in the outlook that choppy rise from 1.0339 is seen as a corrective move. On the upside, above 1.0774 will extend the rise but upside should be limited by 1.0872 resistance. On the downside, break of 1.0588 will indicate that such rise is completed and turn bias to the downside for retesting 1.0339 low.

In the bigger picture, whole down trend from 1.6039 (2008 high) is in progress. Such down trend is expected to extend to 61.8% projection of 1.3993 to 1.0461 from 1.1298 at 0.9115. On the upside, break of 1.1298 resistance is needed to confirm medium term bottoming. Otherwise, outlook will stay bearish in case of rebound.

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Daily Pivots: (S1) 1.2435; (P) 1.2517; (R1) 1.2570; More...

GBP/USD breaches 1.2414 minor support briefly but quickly recovered. Intraday bias stays neutral first. Rise from 1.1986 is seen as the third leg of the consolidation pattern from 1.1946. On the downside, firm break of 1.2414 minor support will argue that it's completed and turn bias to the downside for 1.1946 low. In case of another rise, we'd expect strong resistance at 1.2774 to limit upside and bring down trend resumption eventually.

In the bigger picture, fall from 1.7190 is seen as part of the down trend from 2.1161. There is no sign of medium term bottoming yet. Sustained trading below 61.8% projection of 2.1161 to 1.3503 from 1.7190 at 1.2457 will target 100% projection at 0.9532. Overall, break of 1.3444 resistance is needed to confirm medium term bottoming. Otherwise, outlook will remain bearish.

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Daily Pivots: (S1) 0.9907; (P) 0.9975; (R1) 1.0018; More.....

USD/CHF's declines continues today and reaches as low as 0.9905 so far. Intraday bias remains on the downside for the moment. Fall from 1.0342 is seen as the third leg of the pattern from 1.0327. Next target will be 61.8% retracement of 0.9443 to 1.0342 at 0.9786 and below. On the upside, however, break of 1.0043 will indicate short term bottoming and turn bias back to the upside.

In the bigger picture, rejection from 1.0327 resistance suggests that consolidation pattern from there is still in progress. Fall from 1.0342 is seen as the third leg and retest of 0.9443/9548 support zone could be seen. But we'd expect strong support from there to contain downside. At this point, we're still expecting the larger rally to resume later to 38.2% retracement of 1.8305 to 0.7065 at 1.1359.

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USD/CAD is slightly lower on Tuesday, continuing the downward trend which marked the Monday session. Currently, the pair is trading at 1.3070. On the release front, Canada releases GDP, with the estimate standing at 0.3%. In the US, today's key event is CB Consumer Confidence, with the markets expecting a strong reading of 112.6 points.

All eyes are on Canadian GDP, which will be released later on Tuesday. In October, GDP declined 0.3%, missing the estimate of a 0.1% gain. This marked the first decline since May and has raised concerns that economic growth in the fourth quarter will be weak. If GDP again misses expectations, we could see the Canadian dollar lose ground, and the BoC will be under increased pressure to lower interest rates. Earlier in January, the bank held rates at 0.50% but expressed concerns of economic turbulence due to Donald Trump's protectionist stance, which could have significant repercussions for the Canadian economy.

The markets had predicted that US economic growth would soften in the fourth quarter, and Advance GDP fell short of the estimate. The economy expanded 1.9%, shy of the estimate of 2.1%. Business investment and consumer spending remains solid and should continue into 2017. However, Trump's protectionist rhetoric and action, which saw tensions escalate with Mexico last week, could cloud the bright picture for the US economy.

Donald Trump has barely warmed the president's chair in the Oval House, but has already signed a host of controversial executive orders which have been condemned both domestically and abroad. Trump has withdrawn from the Trans-Pacific Partnership and declared he will reopen the NAFTA trade agreement with Canada and Mexico. He has also ordered work to begin on a wall with Mexico and banned immigrants from seven Moslem countries. Trump's unconventional and disjointed approach to international politics and trade could have major ramifications on global trade and could lead to financial instability in global markets, triggering volatility in the currency markets. Just a few days before being sworn in as president, Trump stated that the US dollar was "too strong", blaming a weak Chinese currency. Predictably, the greenback lost ground after Trump's remarks. It's a safe bet that Trump's offhand tweets and comments will continue to fuel market movement.

USD/JPY is unchanged in the Tuesday session. Currently, the pair is trading at 113.40. On the release front, there were no surprises from the Bank of Japan, which maintained interest rates at -0.10%. Japanese Household Spending declined 0.3%, better than the forecast of -0.8%. In the US, today's key event is CB Consumer Confidence, with the markets expecting a strong reading of 112.8 points. On Thursday, the Federal Reserve will set the benchmark interest rate, which is expected to remain pegged at 0.50%.

On Monday, the BoJ maintained interest rates at -0.10%, where they have been pegged since January 2016. The bank raised its GDP projection for fiscal year 2017 to 1.5 percent, up from 1.3 percent. At the same time, the BoJ highlighted the uncertainty that the economy faces due to the new US administration. President Trump has already taken some protectionist moves, and this could have a negative effect on Japan, which relies heavily on exports. The Japanese yen remains at low levels and the BoJ has previously said that it would consider action if the dollar rose above 120 yen. However, after the rate announcement, BoJ Governor said that the bank does not have a target for the currency.

The markets had predicted that US economic growth would soften in the fourth quarter, and Advance GDP fell short of the estimate. The economy expanded 1.9%, shy of the estimate of 2.1%. Business investment and consumer spending remains solid and should continue into 2017. However, Trump's protectionist rhetoric and action, which saw tensions escalate with Mexico last week, could cloud the bright picture for the US economy.

Donald Trump has just started his new position, but he has already signed a host of controversial executive orders which have been condemned both domestically and abroad. Trump has withdrawn from the Trans-Pacific Partnership and declared he will reopen the NAFTA trade agreement with Canada and Mexico. He has also ordered work to begin on a wall with Mexico and banned immigrants from seven Moslem countries. Trump's unconventional and disjointed approach to international politics and trade could have major ramifications on global trade and could lead to financial instability in global markets, triggering volatility in the currency markets. Just a few days before being sworn in as president, Trump stated that the US dollar was "too strong", blaming a weak Chinese currency. Predictably, the greenback lost ground after Trump's remarks. Still, Trump's shock election win in November has boosted the US dollar, with USD/JPY soaring 8.3% during that time.