Bank of Canada cuts 50 bps to 1.00% and suggests further reductions may be necessary. Bank of Japan Rate Announcement on tap.


* New Zealand Nov. Retail Sales were 0.0% / 0.3% less Autos vs. -1.2% / 0.0% expected
* US Weekly ABC Consumer Confidence fell to -53 vs. -49 expected and -49 last week
* Australia Jan. Westpac Consumer Confidence fell -2.2%
* Germany Dec. Producer Prices fell -1.0% MoM vs. -1.2% expected


* UK Bank of England Minutes (0930)
* UK Dec. Jobless Claims Change (0930)
* UK BOE's Tucker to Testify (0940)
* Canada Nov. Wholesale Sales (1330)
* US Nomination Hearings for new Secretary of Treasury Geithner (1500)
* US Jan. NAHB Housing Market Index (1800)
* New Zealand Dec. Business NZ PMI (2230)
* Japan Merchandise Trade Balance (2350)
* China Q4 GDP (0200)
* China Dec. PPI, CPI, Retail Sales, Industrial Production (0200)
* Japan BoJ to Announce Target Rate (0300)

Market Comments

The freshly minted US president Obama's popularity ratings are soaring as he was sworn in yesterday: according to a poll by ABC News/Washington Post in recent days, 80% of adults approve of the way Obama has handled the transition. And when asked about whether they felt 'better or worse about the future of the United States' with the new president's inauguration, 64% of respondents to an Ipsos poll said they felt better (though only 29% of Republicans, we might add....). Obama's address very boldly stated a new direction for the US and its place in the world - and much of the speech was aimed at a foreign audience - a wise move considering that this was the most watched event in the history of television. The most relevant part of this speech for financial markets was his declaration that, while the market's 'power to generate wealth and expand freedom is unmatched, without a watchful eye, the market can spin out of control.' This spells out the new paradigm that is here with the arrival of Obama: the end of the financial era started by Reagan, who dramatically started the deregulation trend back with his arrival in 1981.

Considering the dire straits the US economy is in as the new president takes power and the willingness of the population to try something new since the old way of doing things was clearly not working, Obama has tremendous latitude in affecting new policies and a new direction. This 'blank check' mentality for an incoming president has been absent since Reagan arrived at the White House in 1981. Of course, with that blank check will come all the blame if things don't improve soon. The trajectory of policy will be a very large role in financial markets, therefore, in the coming year - and following policy response will be paramount for trading all major markets, including currencies. First on the agenda will be the expected $825 billion stimulus package, but perhaps more importantly the new 'bad bank' scheme for unloading bad debts from the financial system.

The pound sterling continues to suffer due to risk aversion and perceived fiscal woes brought on by the UK government's massive additional promises to prop up the banking sector. In a speech yesterday, the BOE's King discussed 'unconventional policy' and the purchasing of assets directly by the Bank of England, moves already well under way by the US Fed. While the first purchases of assets were to be offset with the issuance of t-bills, at issue is the possibility that the BOE would make outright quantitative easing the direct purchase of especially corporate debt. On the latter, King said it may be necessary, and that it could begin in coming weeks rather than months. Other comments, especially that the weak pound and lower oil prices were a boost to the UK economy suggest that King and co. are satisfied with the trajectory of the cratering pound sterling and their policy - intentional or not - of competitive devaluation. The pound crossed through the 1.4000 threshold yesterday, and Jim Rogers lambasted the UK for its situation and said that the UK is 'finished' and that the pound will fall below it's all time low versus the dollar of 1.0520, a level that trade back in 1985. We're not quite willing to go there just yet....after all, the longer US fiscal issues are similar to those for the UK...and once the world economy begins stabilizing at a lower level, the greenback will quickly lose its luster. We suspect that that day is some way off, however....

The Bank of Canada lowered its rate by 50 basis points as expected to bring the rate to 1.00% and indicated that further stimulus may be needed. The BoC is still well behind the Fed and BOE on the need to contemplate unconventional policy measures. While there is much to worry about for Canada's economic future - most notably as it is heavily exposed to the drop in global demand and especially the weaker US economy - it has nonetheless kept its fiscal house in order far better than any of the other G7 currencies. So, on the other side of all of this, the loonie will be a buy. At this stage of the cycle, however, we look for a weaker CAD and it will be interesting to see how USDCAD behaves if the 1.30 level gives way soon. The BoC expects growth to be negative for the full year (-1.2%) after expecting a slightly positive growth number for 2009 as recently as December.

Equities crumbled through support yesterday and many of the JPY crosses are poised at big support areas here that are likely to fall if the sour mood in risk continues. USD strength will follow the same pattern, though the JPY will like outpace the greenback to the strong side if we retest the 2008 lows. Watch for any rhetoric from the Bank of Japan or the Japanese government for rhetoric suggesting the potential for intervention. The trade-weighted JPY is closing in on its all-time highs from the mid-1990's.


EURJPY is closing in on the lows of the range since October of last year. As usual, it will be left to the broader situation in risk appetite to see whether we break lower here or if the pair survives for now and plows back higher into the range. As things stand, the JPY crosses look very heavy.