In the Forex markets risk appetite remains strong with further encouraging news flowing from the EU. But also worth mentioning is the glaring reversal in bias attached to any EU news. Stories that only two weeks ago would be viewed have EUR negative are now given a positive slant and room to recover. Take the Irish political situation, reports of the ruling coalition's collapse failed to give markets a start, as FX and yield spreads were unaffected. And while sentiment remained upbeat today the Irish finance minister stated that a finance bill would pass through parliament by Saturday, eliminating worries that parliament would be disbanded without agreement regarding recent budgetary legislation. We suspect that only a few weeks ago this news would have hit the markets like a bomb causing renewed sovereign credit crisis panic and taking its toll on EUR. But we now live in a brave new world. This shift in bias is critical in our continued call for accumulation of risk correlated FX trades. Also on the positive EU front, unnamed sources have stated that EU officials would have informal discussions on the crisis at the Feb 4th summit, to be concluded by March's summit. Its clear to even the bearish EUR skeptic that this agreement will go though, and for the short term, provide the necessary patch. Two events seem to support this thinking; first is the expectation surrounding the Eurozone's debut bond issue (rumored to be 4 times oversubscribed), which seems a bargain with its AAA rating and yield slightly over German bunds. Second, is the report that the ECB purchases of EU peripheral bonds in the secondary markets has decreased to a paltry €146m vs. €2.313bn just last week. The recent EUR move has been impressive and there are definitely analysts which suspect a correction is due. We believe the absence of a longer term credit crisis theme will allow the emergence of other drivers including interest rate differentials and external rebalancing. In Australia, CPI surprisingly dropped to 0.4% q/q vs. 0.7% exp. The sudden realization that short term pressure was not as high as originally anticipated caused the AUD to drop roughly 50 pips as traders (momentarily) adjusted their RBA rate expectations. However, the post flood reconstruction efforts are expected to rebuild price pressure and we still envision the RBA will be on track to tighten 3 times this year (despite damage to growth caused by halted commodity exports). In Japan, as we had expected the BoJ rate policy meeting was a non-event (see Central bank Preview). The bank kept policy overnight call rates unchanged at 0.0- 0.10% and no additional measures were announced. However, the forecast for CPI was revised higher for the fiscal year of 2011 to 0.3% y/y from 0.1%. This minuscule shift doesn't shake our view that no tightening will occur in the next 2 years (i.e. preferred carry funding currency). In the UK, GDP numbers surprised to the downside falling to -0.50% q/q vs. +0.5% exp (+1.70% y/y vs. +2.60% exp). The soft number deflated our view that higher growth rates would give the BoE Hike Theory and long sterling stance further credence. And of a final note, president Obama's state of the union address tonight is expected to focus on job creation, but we suspect it will be a tremendous flop. Barring announcement of more fiscal spending, we doubt the US government truly has the instruments to simulate long term sustainable employment on a magnitude necessary to dent the elevated unemployment rate. Furthermore, knee jerk USD buying should be seen as an opportunity to trade in the other direction.
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