* Treasury trading will start in earnest

In very thin dealings in the past two sessions that surrounded New Year, Treasuries corrected sharply lower. Yesterday, rallying equities were a driver while a dismal ISM report was put aside. In the next few sessions, it will become clearer whether the bullish sentiment that reigned for months is easing.

* European bonds open lower today

Today, trading will heat up on the European bond market too. Although, the eco calendar looks thin, the Italian and Spanish inflation data are likely to attract attention ahead of tomorrow's flash CPI. Later on this week, the auctions from Germany, France and Spain may provide a first indication with regard to investor's appetite for European government bonds.

* Currency markets looking for a new trading theme?

After remarkable calm in most major cross rates at the end of last year, currency markets will enter normal trading conditions from today on. Friday's payrolls probably will be the first real test to assess sentiment on major cross rates. For sterling, the BoE interest rate decision will be the key.

The Sunrise Headlines

* US Equities started the year on stronger footing led by energy shares. Dow/S&P ended 2.94% / 3.16% higher. Asian stocks extend their rebound on US plans to cut taxes.
* US President-elect Barack Obama plans to propose up to $310 billion in tax cuts for business and the middle class as part of his massive economic stimulus plan, according to senior democratic aides.
* Israeli forces continue ground attacks against Hamas militants in the Gaza Strip. French President Sarkozy is heading to the Middle East to try to persuade Arab and Israeli leaders to agree to a 48-hour truce to allow humanitarian aid.
* German Chancellor Angela Merkel faces pressure within her coalition to cut taxes to shield Europe's biggest economy from the global downturn.
* Bank of Japan governor Shirakawa said a rising yen would have a big negative impact on Japan short term, but gave only a few hints on how he might mitigate the effects of the global credit crunch.
* Crude oil ($47.52) extends its rise on Monday as concerns about violence in the Middle East are mounting and on the deepening Russian gas supply row.
* Today, the calendar contains the Spanish and Italian CPI data and US construction spending and vehicle sales.

Currencies: Currency Markets Looking For A New Trading Theme?


At the end of last year and during the first trading day of the new year EUR/USD basically held a sideways trading pattern in the 1.40 area. The first sets of eco data on both sides of the Atlantic (PMI/ISM in Europe and the US) continued to paint a bleak picture on the economy but had no lasting impact on the (currency) market. Stocks did rather well at the first trading day of the new year but also this was not able to give EUR/USD a clear direction. The euro failed to make any sustainable gains on the cautious return of risk appetite on the stock markets and EUR/USD closed the first trading day of the year at 1.3921. However, with a lot of traders not yet at their desks it is too early to draw any firm conclusion from Friday's price action.

Support comes in at 1.3840/22 (Last week low/19 Dec low), at 1.3806 (38% retracement), at 1.3761 (Weekly envelope), at 1.3726/12 (Daily envelope/ Break-up daily).

Resistance is seen at 1.3963/80 (ST high + STMA/ Daily envelope), at 1.3990 (MTMA), at 1.4055/69 (Reaction highs).

The pair is in neutral territory


Today, the US eco calendar is thin and this is also the case for Europe.

Mid-December, the Fed shifting its policy into the direction of quantitative easing while the ECB showed highly reluctant to take further aggressive steps in their monetary policy hammered the dollar and propelled the EUR/USD pair to a new recovery high in the 1.47120 area. Later in the month the pressure on the dollar eased as markets entered a remarkable end of year calm.

Going forward, the key question is what will be the next theme the currency markets will play. Will monetary policy remain the key driver for EUR/USD trading? If that would be the case, the euro might still be favoured over the dollar. Or will the markets gradually focus/anticipate on the potential positive impact from the stimulus measures that were already put in place and that will be announced with Obama entering the White House. If the markets would give more weight on this theme, the picture could become more dollar positive.

Since mid November we had a USD negative approach. At the start of this new year we turn more neutral on EUR/USD. The US payrolls and the market reaction to this report will be a first pointer on market thinking/behaviour. We still tend to think that it's a bit too early to front-run on a sustained economic rebound. The ECB assessment on monetary policy (to cut or not to cut in January) will be another factor of importance. We start the week with a neutral bias on EUR/USD. As we are cautious on a quick improvement in the eco data, we maintain our long-term dollar skeptic attitude.

From a technical point of view, EUR/USD in December broke above the previous sideways trading pattern and an important downtrend line (cf graph). This makes the LT picture for EUR/USD positive. However, the rebound lost momentum in the second half of December. The short-term picture for EUR/USD is neutral. If the pair drops below the 1.3840/22 area, this could be an indication that the dollar correction/ rebound has some further to go short-term.

During the last to weeks of 2008, tensions also eased in USD/JPY. After setting lows below the 90-mark mid December, the relative calm in most other markets also filtered through in USD/JPY trading and the pair settled in the 90 area. The positive start of the new year on Wall Street on Friday helped USD/JPY to close the first trading day with a decent gain at 91.83.

This morning, Asian/Japanese stock markets are also mostly in positive territory and this helps USD/JPY to maintain Friday's gains. Short-term, the gyrations in the stock markets will continue to be the main driver for USD/JPY trading. Japanese authorities recently continued to warn on the potential negative consequences of the strong yen for the Japanese economy (BOJ's Shirakawa on Sunday). However, we don't have the impression that interventions are around the corner at this stage.

Looking at the charts, global market stress and overall dollar weakness in the wake of the US Fed moving ever more in the direction of quantitative monetary easing hammered USD/JPY and the pair set a reaction low in the 87.20 area on December 17. Since then, the pair entered calmer waters and settled in a sideways trading pattern close to the 90 mark. Before the holiday break, we had USD/JPY negative bias. In a short-term perspective, the picture for USD/JPY turned more neutral again. If stocks remain positively oriented, the rebound in USD/JPY can go still somewhat further short-term. The long-term trend in the pair remains negative.

Support stands at 91.68/46 (Daily envelope/Break-up), at 91.03 (Broken weekly MA), at 90.77/57 (Reaction low/MTMA/Boll Midline).

Resistance comes in at 92.18 (ST high), 92.40 (Reaction high), at 92.62/82 (23% Retracement/Daily envelope), at 93.05 (Boll Top) and at 93.91 (8 Dec high

The pair is in neutral territory

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