The declaration by California's new Governor that the budget deficit had hit crisis level seems to have been shrugged off by FX markets so far. The Governor's attempt to force lawmakers to address the nearly $25.6bn short fall by issuing a fiscal state of emergency highlights to us the impending risk and potential shift in focus of the sovereign credit story in the USA. Yields dropped and the spread between US and German bonds has now widened to a level more indicative of the EURUSD above 1.40. So while we are not seeing widespread USD selling, there are definitely cracks developing in the currency facade. Part of the problem is the encouraging US data which printed yesterday. Initial jobless claims fell more than estimates to 404k which implies the weaker trend in Q4 has been sustained. US Existing home sales astonishingly jumped 12.3% in Dec to a 5.28 million, the highest monthly print since mid 2010, and the Phil Fed. Manufacturing survey slipped down to a still robust 19.3 in Jan. Short term pundits expressed optimism around the US data and revived the concept that the USD should be considered a growth currency. We suspect this analysis is correct for short term macro traders, but over the long term it is unlikely to hold and in turn the USD rally will be brief. Once again, artificial stimulus in the form of QE2, and the fiscal side of the equation in the form of extending Bush era tax cuts, will not provide sustainable growth activity. Therefore without some level of US austerity or sustainable growth the US is a ticking financial bomb. Back in Europe, markets have yet to get the much anticipated agreement on the EFSF from European officials, and in fact have received just more divergent comments. The overriding sentiment is that eventually a deal will get done. Undoubtedly there will be bumps such as concerns over Irish elections mid-March and the European Council President Van Rompuy stating there was little chance of a separate meeting on the EFSF during the larger EU leader's summit on February 4. This will provide ample opportunity for EUR skeptics to panic, but we see these dips as opportunities to build long EUR positions. And on a final note, the SNB's Hildebrand and Danthine have both sounded concerned recently about the effect of current CHF strength on Swiss growth. However, Hildebrand reiterated that the justification was based on fears of deflation and these risks have most evaporated. We continue to expect that the SNB will stand on the sidelines, merely praying that risk in the EU dissipates and capital flows reverse, as FX intervention is clearly not an option.