With much of Asia enjoying the New Years holiday, FX price action was limited and volumes low. Other than the ECB rate announcement and subsequent press conference, traders have been focused on weather patterns in the Southern hemisphere and escalating protests in Egypt.

Cyclone Yasi hit Australia's Queensland coast, prompting lots of great news footage but limited lasting damage before being downgraded to a measly category-2. While total damage is still unknown, we are hearing that local miners are already preparing to go back to work suggesting that extended suspension of the Australian commodity industry is unlikely. This is good news for the AUD bulls (and regional Asian, inflation worried central bankers) as the limited effect on growth will keep the RBA focused on the mid and longer term; not short term disruptions in growth or inflation trends. The pre-cyclone selling has quickly worn off as tomorrow's monetary policy statement (MPS) will be released and we believe that the markets are overly dovish in their positioning considering the expected CPI forecasts - watch for another push above 1.0150.

In Egypt, the initially peaceful protests have turned violent, causing concern about potential disruption of service in the Suez Canal (as opposed to fears of regional contagion). There are reports that as a precautionary measure some tankers are big re-routed around the Cape of Good Hope. As expected, crude prices have reversed Monday's unwind of Egypt risk premium with WTI climbing back to $91.76 and Brent's unrelenting rise to $103.37. In the FX markets, the escalation did assist USD bulls in temporarily regaining some ground, but the overall risk aversion trade seems unconvincing.

In London, copper pieced the $10,000/ton resistance as industrial commodities continued to be accumulated on concerns over supply disruptions. While the events in Egypt are fascinating, we suspect that from a trading standpoint the markets will be primary focused on interest rate differential stories evolving around today's ECB meeting (see Central Bank Preview). Considerable expectations for a hawkish Trichet have dominated market chatter. The combination of the latest Eurozone CPI print for January which printed at 2.4% y/y (well above the ECB target of 2.0%) and subsequent comments from both Trichet and ECB officials do suggest that the central bank will stand firm on its price stability mandate. The ECB press conference will be the main focus, with Trichet's words certain to be measured for further hawkishness. We are in agreement that the ECB will decouple from the Fed's monetary policy path; a scenario which will further diverge interest rate differentials and provide the EUR with fuel to rally further. However, the recent impressive EURUSD run has become slightly overstretched and despite yesterday's minor pullback, we are looking for a deeper correction before the EURUSD can attempt a move towards 1.4000. A less than ultra hawkish Trichet today could provide that disappointment to trigger the corrections.

In other EUR news, S&P downgraded Ireland one notch to A-, holding the rating on negative outlook. This was expected, as both Moody's and Fitch had already revised the credit ratings on Ireland's sovereign debt one notch lower. Meanwhile, European Council President Van Rompuy announced that by March 25th the EU will be prepared to release a comprehensive solution to the sovereign debt crisis - with the optimistic statement adding to declines of sovereign CDS prices.

Taking a back seat yesterday was the US ADP report, but it will likely be discussed more the closer we get to Friday's payrolls. ADP private payrolls for January were 187k vs. cons. 140k; after the devastating NFP figure last month (104k), models have been adjusted upwards. Recently the USD has reacted negatively to disappointing data, should the mother of all US economic indicators fail to hit expectations, Kansas City Fed President Hoenig's QE3comments will be ringing in the markets ears and watch for everyone to abandon the sinking USD ship.