Bounce in risk could signal an extension of the range trading environment rather than a new leg of the risk averse trend.


MAJOR HEADLINES – PREVIOUS SESSION

  • US Jan. NAHB Housing Market Index out at 8 vs. 9 expected and 9 in Dec.

  • New Zealand Dec. Business PMI out at 42.5 vs. 35.4 in Nov.

  • Japan Dec. Adjusted Merchandise Trade Deficit out at JPY -149B vs. -329B expected

  • China Q4 GDP rose 6.8% YoY as expected

  • China Dec. Producer Prices fell -1.1% YoY vs. -0.1% expected

  • China Dec. Retail Sales rose 19.0% YoY vs. 19.5% expected

  • China Dec. Industrial production rose 5.7% YoY vs. 4.2% expected

  • Japan BoJ kept rates unchanged at 0.10%


THEMES TO WATCH – UPCOMING SESSION

Events Today:

  • Sweden Dec. Unemployment Rate (0830)

  • EuroZone ECB to publish monthly report (0900)

  • Switzerland Jan. ZEW Survey (1000)

  • EuroZone Nov. Industrial New Orders (1000)

  • Canada Dec. Leading Indicators (1330)

  • Canada Nov. Retail Sales (1330)

  • Us Dec. Housing Starts and Building Permits (1330)

  • US Weekly Initial Jobless Claims (1330)

  • US Nov. House Price Index (1500)

  • Canada Bank of Canada Monetary Policy Report (1530)

  • US Weekly Crude Oil and Product Inventories (1600)

  • Japan BoJ Monthly Report (0500)

Market Comment:

A very robust bounce in equities yesterday took some punch out of the USD and the JPY, which fell back after attempting stronger through interesting levels. GBPUSD was all the way down through 1.3700 before bouncing to above 1.4000 overnight in a spectacular display of volatility. The JPY crosses were heavily influenced not only by the action in equities, but also by an enormous option strike rolling off yesterday that caught the market off-guard when an expected JPY sell-off failed to materialize and sent the nervous shorts for the exits. EURJPY spiked down to an almost 7 year low, and USDJPY briefly grazed 13+ year lows before rallying almost 3% later in the session and overnight. EURJPY rallied even more sharply. This, combined with the strong reversal in the stock market, suggests that the risk aversion trade now has a lot of proving to do in the shortest term if we are to believe that a new leg of the risk averse downtrend is about to kick off here. Instead, the market may decide to give Obama a chance to prove himself for some weeks before deciding that hope is a bit premature.

Timothy Geithner, the US Treasury Secretary nominee, was grilled by the US Senate in his nomination hearings. Much of the focus was on his failure to pay some payroll taxes for employees rather than his stance on the issues, though he did manage to send a general warning on currency intervention when asked about Japan's potential for intervening, stating that "I believe that it's very important for the United States and for the global economy that our major trading partners operate with a flexible exchange rate system, in which market forces determine the value of exchange rate". While the question is about Japan, Geithner's rhetoric was more likely aimed at China, and in general suggests a continuation of the competitive devaluation, weak USD policy of the past. We will have to wait and see what style the new secretary will bring. Considering that he is not from the private sector but has been a lifelong bureaucrat, we can expect a general attitude of heavy handed regulation and control of the financial sector as we lurch along the path of unwinding the deregulation and lack of oversight trends started under Reagan and reaching their zenith under President Bush II.

GBP was pounded for further losses after the BOE minutes confirmed the view that the BOE is not concerned with the pound's weakening and even sees it as an aid to monetary policy and a help to the economy. Still, in our view, the weak GBP looks very extended and if we are seeing a pivot point at the bottom of the range here in the general risk appetite them, GBP could actually outperform in the shortest term. EURGBP was capped yesterday as Trichet was out saying that no decision has been made that 2.0% will be as low as the ECB goes.

Overnight, China registered a Q4 growth number in line with expectations at 6.8% YoY - the lowest growth level in seven years. We wonder if the real figure was not even lower considering the wealth of scary anecdotal evidence. With demand collapsing around the world and shipping rates at zero, how can the Chinese economy even grow?

CHF was also weaker on the move higher in risk appetite, but most of the force of the CHF weakening was triggered by the SNB's Hildebrand, who said that the SNB's next tool was intervention in the market now that interest rates are so low and that it can't defend the franc against strengthening via rate cuts. Mr. Hildebrand said that "The SNB is able to sell unlimited Swiss francs versus another currency. In an extreme case, it can commit itself at the same time to buying unlimited currencies at a fixed- exchange rate." The market read Mr. Hildebrand loud and clear.