The Bank of Japan surprised markets overnight, as it decided to expand its asset buying programme by Y10 trillion to Y65 trillion (the entire amount will be used for the purchase of long term government bonds) and set a price stability goal of 1%. In doing so it is abandoning its long used “understanding of price stability” phrase. The consensus view had been that the BoJ would leave policy on hold, with the yen sold across the board after the announcement. The dollar hit three week highs, though the yen remains fundamentally strong and a safe haven of choice.

Meanwhile, the euro came under selling pressure versus the dollar yesterday and overnight and to a lesser extent versus sterling as markets reacted to the news of eurozone sovereign debt downgrades from international ratings agency Moody’s. It downgraded Italy, Spain and Portugal and warned of debt downgrades for France and Austria. In an even bigger surprise, however, it also warned that it could strip the UK of its triple A rating. A warning is not seen as potentially dangerous as being on credit watch but there is still around a 30% that the agency could act on it. The announcement weighed on sterling versus the dollar. Markets sentiment is also being undermined by ongoing concerns over a final solution to the Greek debt problem against a backdrop of violent protests. In addition, Greece still has yet to reach a deal with its private creditors on the haircut they would be willing to take on their holdings of government bonds. It is expected to make an announcement on this by the end of this week. Attention is now on the euro-zone finance ministers’ meeting scheduled for Wednesday, where it is expected that a second bailout package for Greece will be approved.