It seems that the worries over quasi- sovereign and sovereign debt are still lingering in traders psyche, as risk correlated trades failed to pick up any traction. And perhaps for good reason, since defaults generally come in waves. In Athens, the Greek Prime Minister Papandreau provided an outline of further fiscal measures to support the promise to cut deficit to 3% over the next four years. However, it was light on real details and markets were unimpressed. The EURUSD collapsed at the start of the Europe session due to heavy USD buying, falling to 1.4553 from 1.4660, while USDJPY maintained its consolidation pattern around the 89.00 figure. Yesterday, equity markets in Europe and the US traded higher, with S&P500 closing at new highs. Yet, Asia has failed to follow. Low liquidly at certain points in the day is becoming more of a fact in trading the closer we get to the holidays and the recent correlation between equity markets, US data and EURUSD continues to show signs of divergence. In a surprise, the RBA minutes revealed that the decision to hike rates by 25bp to 3.75% was closer than most participants believed (near unanimous expectation for a hike by local economists). The minutes stated this adjustment, together with those in the preceding two meetings, as materially shifting the stance of policy to a less accommodative setting and, therefore, as increasing the flexibility available to the Board at future meetings. In addition the probability for a third consecutive rate hike according to the now slightly less hawkish RBA were finely balanced. In regards to the domestic economy, the RBA remained positive and supportive of further monetary tightening, but given the verbiage, markets will have to wait until Q2 2010. On the heels of the minutes, AUD came under selling pressure, then was amplified by strong USD buying, causing AUDUSD to trade down to 0.9075. We expect a further 50bps of hikes (to 4.25%) in the first half of 2010, this is slightly less than the 75bps we expected before this release. With the pace of tightening looking to slow, this may be an opportunity to sell AUD vs. currencies which look like they are likely to accelerate towards tighter monetary policy in the coming month - such as NZD, or CAD. In the European session, the UK CPI should outshine German ZEW figures. The BoE's Inflation Report has already braced markets for a sharp uptick in inflation in the short term.. This combined with Friday's softer PPI figures means it is unlikely GBP will be supported by an upside surprise. More significant will be Dubai headlines, given the exposure of UK banks to Dubai's debt. In the US session, markets will be watching Industrial Production which is expected to show the most improvement. Interestingly, the figure will be less important in our eyes than the market's reaction. The inverse relationship between USD and US data since the financial crisis has dominating trading strategies but recent trading patterns, such as response to strong retail sales and NFP, suggest the historic correlation of better than expect US data leading to USD buying has returned. Overall in the FX markets risk reduction into the end of the year seems to be establishing itself.