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Ahead of the ECB meeting, there are a several developments to note. In terms of price action in the foreign exchange market, the Australian dollar has been lifted by constructive economic data, which included the country's trade surplus instead of the expected deficit and a firm expected retail sales report. The RBA's Statement on Monetary Policy early tomorrow will underscore dropping of the easing bias and likely lift the June inflation forecast.

The Aussie traded near $0.90, its best level since mid-January. Near-term technical potential extends toward $0.9100, depending on the general investment environment (ECB meeting today and US jobs tomorrow). The risk is that the market gets ahead of itself with speculation of the timing of the first hike.

Australia reported a A$468 mln trade surplus in December. To the dismay of the Aussie bears, the trade surplus was helped by a jump in iron ore exports and increased demand from China. In addition, the November trade deficit was revised to a small surplus. Separately, December retail sales rose 0.5%, a little stronger than many expected.

Japan's weekly portfolio flow report commanded attention. Foreign investors' near insatiable appetite for Japanese equities went into reverse in a big way. Last week, they sold JPY792 bln worth of Japanese shares, the most in more than three years. They have now been net sellers in three of the past four weeks. For their part, Japanese investors have sold foreign bonds for the fifth consecutive week, but the JPY1.815 trillion in sales was the most since the flurry of selling at the start of the second half of the fiscal year that began in October.

After coming off sharply at the beginning of the week, the dollar has been consolidating against the yen and that consolidation phase is continuing today. A break of the JPY100.80-JPY101.80 range will be seen as pointing to the direction of the next big move, though we are wary of a false break in response to the ECB meeting outcome.

Late yesterday, Moody's upgraded its rating for Mexico to A3 from Baa1, with a stable outlook. The main factor behind the decision was the belief that the government's reforms will boost the growth potential of the economy. The other two main rating agencies give Mexico a BBB+ rating. We suspect they will play catch-up over time. The peso strengthened on the news, which helped lift sovereign debt prices, but also Mexican corporate bonds.

While Mexico could not avoid the carnage inflicted on emerging markets over the last couple of weeks, we look for its relatively better macro fundamentals to allow it to be one candidate that recovers quickly as some semblance of stability returns.

Although Germany will report factory order data later in the European morning (consensus is at a softish 0.2%), barring a major disappointment, the market reaction will be inhibited by the proximity of the ECB meeting. We suspect that barring the establishment of a negative deposit rate, the bias for the euro may be higher. A small repo rate cut may spur a knee-jerk decline, but most participants will likely see it as largely immaterial in addressing either the dearth of lending or the threat of deflation. It is notable; we think that the euro has been remarkably resilient in the face of the speculation of easing by the ECB and yesterday's horrific retail sales report (-1.6% in December and the downward revision to the November series).

In disappointment, we suspect the euro could rally toward $1.3600. This corresponds to the 20-day moving average and the 50% retracement of the decline from the $1.3740 high seen in late January. The week's low, which is the low for 2014, was set on Monday just below $1.3480.

Source: On The Way To The ECB Meeting...