GBP Breaking Stronger vs. EUR and CHF after BOE Cuts to 1.00%. ECB Steady at 2.00% as Expected

JPY crosses zigging and zagging with no real conviction - should JPY longs be cautious here?


* New Zealand Q4 Unemployment Rate rose to 4.6% as expected and vs. 4.2% in Q3

* UK HBOS house Prices rose 1.9% MoM vs. -1.6% expected

* Germany Dec. Factory orders fell -6.9% MoM and -25.1% YoY vs. -2.5%/-24.5% expected

* Bank of England cut interest rates 50 bps to bring the rate to 1.00% as expected.


Events Today:

* Canada Dec. Building Permits (1330)

* US Q4 Nonfarm Productivity and Unit Labor Costs (1330)

* US Weekly Initial Jobless Claims (1330)

* US Fed's Plosser to Speak (1330)

* Canada Jan. Ivey PMI (1500)

* US Dec. Factory Orders (1500)

* US Jan. ICSC Chain Store Sales (no time given)

* Switzerland SNB's Hilebrand to Speak (1730)

* Us Fed's Bullard to Speak (1800)

* US Fed's Stern to speak (1900)

* Australia Jan. AiG Performance of Construction Index

* Japan Dec. Leading Index (0500)

* Switzerland Jan. Unemployment Rate (0645)

Market Comment:

Equities tried to stage a rally yesterday as the ISM Non-manufacturing number recovered a couple of points rather then sinking further. Still, the number represents a service sector in strong contraction, and services are still the majority of the US economy. Also on a positive note, the ADP number was slightly less bad than expected. But the numbers were not sufficient for the market to really hang its hat on and the rally in risk crosses quickly faded later in the North American session.

GBP followed up stronger versus its European counterparts yesterday and this morning ahead of the Bank of England meeting. The Bank cut 50 basis points as expected, bringing the rate to a new record low of 1.00%. As a small minority were looking for a 100-basis point reduction in rates, the news can be considered marginally GBP-positive, all else being equal. The immediate reaction saw the 0.8800 key support level coming under fire and even falling as this is being written ahead of the ECB press conference. The BoE also released a series of statements indicating its negative view on the situation, but did note that the drop in the pound and existing fiscal policy should help to give a boost to the economy, even if the transmission mechanism of the monetary policy was impaired [and if that is the case, then the market starts to ponder the whole quantitative easing line of logic]. All in all, this latter note suggests some degree of applying the brakes to the otherwise dovish trajectory and with GBP pushing through key levels, could be triggering a sustainable uptick in GBP against the other major currencies.

Also GBP supportive was the odd Nationwide housing numbers from December, which suggested that UK home prices ticked up in December even if they were still off over 17% from a year earlier. This could simply be due to a rise in activity due to the lower prices, a bit less panic in the forced sales market, etc...rather than a sign of imminent recovery. Still, the shocking pace of the previous drop may not be repeated any time soon, and the leading RICS indicator suggest that a lower percentage of agents are seeing housing prices falling, so we could be in for a couple of months of relative stability.

The ECB left rates unchanged as expected as today's meeting came only three weeks after the previous one. Watch Trichet for further developments. He is likely going to express a reluctance to move rates much lower, but that the ECB will do what is necessary...etc and yawn...As with last time around for the ECB: is there really any EUR bullish outcome?

JPY crosses are looking less heavy than one would have suspected they would with the marked weakness in equity land late yesterday. In the broader picture, considering the mayhem that this global slowdown is creating for Japan's export-driven economy, we are considering noting some caution for JPY longs here, meaning that we need to see the crosses proving themselves lower before we would consider jumping aboard, as it seems they are having a difficult time working up a head of steam. GBPJPY, one of the most popular trades (on the short side) in the strong JPY cycle, has now rallied almost 10% from its lows on the year below 120.00. AUD and NZD and some of the EM currencies are looking a bit resilient here as well and risk spreads are simply in the doldrums. With the fear levels seeming to fade somewhat, it appears that back and forth sloshing and a treacherous ranging environment with false breaks is as likely as a new big bear trend here in the risk aversion-themed FX crosses....stay tuned and watch the 800 level in S&P500, as this is a big trigger event across markets.

NOK continues to look strong after the bank cut rates 50 bps yesterday, a marked sign of strength in this market as we suspected there was some chance of a consolidation higher yesterday in the wake of the Norges Bank meeting. Could we be hitting a fifth wave already for the decline from the 10+ top? If so, this wave could take us all the way to 8.50, where the 200-day moving average might be in a few days time from its current 8.475 level.