France may well be the next spark

Outlook:

We go into a new week with reduced anxiety about the US debt ceiling and the government being shut down, although we still don’t know whether Pres Obama will win the confrontation (he refuses to negotiate the debt ceiling). The Republicans are carping about his defense of the liberal agenda (not only the social safety net but also immigration, climate change, gay rights), but it’s particularly ugly and distasteful in light of the celebration of a more just society and a more perfect union. The Plubs are on the ropes, but they can still bounce back.

Now that the world is safe for risk, it looks like the only thing standing between a stock market and euro rally might be some kind of institutional change in the European banking sector. If it really was the Bafin story that tanked the euro by 100 points in a few hours, this is a powerful factor. On this we just have to stay tuned. Since everyone in high office is mighty happy with himself for having ended the debt crisis, from Draghi to Junker, no one is going to be in any hurry to upset the apple cart again so soon. One little warning—French 10-year yields are creeping up. We periodically get talk of terrible hidden distress in the French banking system, not to mention the economy. France may well be the next spark.

In the US, the calendar will be dominated by earnings reports but we do get real economic data, including (today) existing home sales and the Chicago and Richmond Fed indices. Tomorrow, SecState Clinton testifies on Benghazi and we get the Fed’s house price index (plus the Bank of Canada policy meeting and HSBC China manufacturing flash PMI).

Thursday brings the usual jobless claims, the PMI flash index for Jan, the Kansas City Fed manufacturing index, the Conference Board leading indicators, and the Fed balance sheet. Friday, it’s new home sales in the US and the most important indicator of the week after ZEW, the German IFO business climate. And oh, yes, the WEO starts in Davos, with plenty of sound-bites. We will also start preparing for the Fed meeting next week and on Friday, the payrolls report.

Unless there is an institutional crisis somewhere, we see no reason for the dollar to hang on to gains—except against the yen.

	SPOT	CURRENT POSITION	SIGNAL STRENGHT	OPEN DATE	OPEN RATE	POSITION GAIN/LOSS
USD/JPY	88.78	LONG USD	STRONG	10 /17/12	78.71	11.34%
GBP/USD	1.5844	SHORT GBP	WEAK	01/18/13	1.5942	0.61%
EURO/USD	1.3345	LONG EURO	STRONG	11/26/12	1.2970	2.89%
EURO/JPY	118.48	LONG EURO	STRONG	11 /21/12	105.38	12.43%
EURO/GBP	0.8422	LONG EURO	STRONG	11/26/12	0.8095	4.04%
GBP/JPY	140.66	LONG GBP	STRONG	11/21/12	131.02	7.36%
USD/CHF	0.9283	LONG USD	STRONG	01/18/13	0.9336	-0.57%
USD/CAD	0.9916	SHORT USD	WEAK	01/03/13	0.9858	-0.58%
AUD/USD	1.0572	LONG AUD	WEAK	01/03/13	1.0506	0.63%
AUD/JPY	93.87	LONG AUD	STRONG	10/17/12	81.19	15.62%
USD/MXN	12.6652	SHORT USD	WEAK	11/26/12	12.9780	2.47%