A round of second tier data has been pushing the low volume Forex markets around, providing little in terms of directional indications. Traders are still debating the meaning and longevity of yesterday's S&P downgrade of Japan's long-term sovereign debt; the rating was demoted one notch to AA- and the outlook for the rating was considered as stable. The usual reasons for the rating cut have been cited as weak growth, shifting demographics, deflation threat and political ineptitude that will hinder any progress on addressing the country's ballooning debt. This most recent downgrade comes after a string of credit rating adjustments; most recently Moody's cut to Aa2 in May 18 2009. There seems a general malaise surrounding the meaning of the downgrade by most analysts, who are quick to reference the lack of concerns and movement in JGBs or the JPY after prior adjustments. We are definitely not so cavalier. We are not living in the 1990's and traders are clearly hypersensitive to growing sovereign risks. The primary statistic participants offer for why Japan will be sheltered from any credit shock is that foreign investors' holdings of total Japanese public debt are around 15% (external holdings of JGBs are short of 10%) - negative effects from any downgrade and spikes in funding concerns generally happen to countries will larger external funding requirements. We agree in the near term this will protect Japan, however there has been significant erosion in domestic savings rates and therefore slow domestic demand for debt; while languishing growth provides little opportunity to halt this trend. We are bearish in the JPY for 2011 and suspect the currency won't be able to internalize many more credit rating downgrades or sagging investor confidence. In the US headline durable goods surprisingly dropped while jobless claims rose (seems like weather is the fashionable scapegoat this week). In spite of the negative news, the S&P 500 continues to trek higher, piercing the 1300 barrier for the first time since Sept 2008. We are expecting a broader rally in risk correlated trades as risk sentiment improves and major central banks don't shift into tightening gears until mid 2011. On the subject of monetary policy, ECB Executive Board member Bini-Smaghi sounded very hawkish which provided the EURUSD with some support. He highlighted the growing concerns over Eurozone inflation, especially second round effects entrenching themselves. The comments reinforce expectations that the ECB will be forced to act earlier than the US or UK. The growing interest rate differential has been one of the key drivers to the recent EUR rally, especially against the USD. Another light day will make for continued choppy trading, but the highlight of the day will be US Q4 GDP and the University of Michigan confidence index. And live from Davos, Treasury Secretary Geithner will be discussing the global economy.