Top Stories

* Nikkei down nearly 5% after holiday

* Germans pass 50B euro stimulus package

* Japan FinMin Nakagawa - watching FX market with caution

* Russia starts pumping gas to Europe

* Gold crumbles as dollar strengthens last $818/oz

* Oil continues to decline $36/bbl last

Overnight Economy

* NZD NZIER Business Confidence - 64 massive fall off from -19 last

* JPY Bank Lending 3.7%

* JPY Current Account .65T vs. .62T forecast

* JPY M2 Money Stock 1.8% vs. 1.7% called

* GBP BRC Retail Sales Monitor -3.3% against -2.8% last

* GBP RICS House Price Balance -73.5 slight improvement form -75.8 last

* JPY Economy Watchers Sentiment record low at 15.9

* EUR German WPI -3.0 vs. -1.7% forecast

* GBP Trade Balance -8.3B vs. -7.6B called

* GBP DCLG HPI -8.6% vs. -8.5%

Event Risk on Tap

* CAD Trade Balance expected at 3.3B

* USD Trade Balance expected at -53.5B

* USD IBD/TIPP Economic Optimism

* USD Federal Budget Balance expected at -40.5B

Price Action

* USD/JPY breaks 8900 to the downside despite Nakagawa warnings as equities drop

* AUD/USD dribbles to 6700 as risk aversion kicks in

* GBP/USD craters to 1.4600 after worse than forecast Trade data

* EUR/USD probes the 1.3200 level as credit worries EUR/JPY sales weigh

The EUR/USD continued its descent today in early European trade coming within 20 points of the 1.3200 figure as worries over the credit downgrade of Spain and a series of EUR/JPY sales weighed on the pair for a second day in a row. The Nikkei closed down nearly 5% after Japanese investors returned from their Monday holiday and this latest wave of risk aversion kept the pressure on the euro while propping the dollar and the yen.

On the economic front the latest German inflation data showed a much larger decline of -3.0% vs.- 1.7% expected, annihilating any argument for ECB's continued hawkishness. European price levels now signal the possibility of deflation rather than inflation inviting much more aggressive action from the ECB.

Nowhere is this dynamic more clear than in the oil market with crude sliding to $36/bbl despite continued tensions in the Middle East. Given the complete absence of any price pressures in the Euro zone economy, some traders have started to anticipate a 75bp rate cut from the ECB this Thursday. We very much doubt that Mr. Trichet and company would suddenly become so dovish in their monetary policy and anticipate a 50bp rate cut at most.

Nevertheless, the change in market view via a vis the pace of rate cuts in the Eurozone along with nascent worries over the credit worthiness of some of the union's member states has produced a negative bias towards the euro at the start of this week. The pair is approaching some intermediate level support near the 1.3200 handle, but the bounces so far have been anemic at best.

In North American session today, the key event risk lies in US trade data which may surprise to the downside but should nevertheless show a marked improvement from the month prior given the collapse in oil prices. Having dropped more than 600 points in the past 3 sessions, the EURUSD could stabilize for the time being as it has now reached the lower levels of its broad 1.30-1.40 range. However, unless the currency market sees a new catalyst for dollar weakness the path of least resistance for the pair remains down