Market Brief

The Usd corrected slightly in the Asian Session from yesterday's strong rally on risk aversion. The EurUsd traded up from 1.2850 to 1.3019, while the UsdJpy traded down to a low of 89.69. Markets remain highly volatile and developments are coming fast and furious. The Sterling was punished yesterday, as the governments bailouts continued and rumors swirled regarding S&P downgrading of UK country debt, trading from 1.4512 down to 1.38915 (8-year low). In addition, there newswire reports of potential nationalizations of Irish and UK banks. Not even the positive sentiment from President Obama inauguration could offset the negative tone across markets. US equity markets fell sharply, with the S&P closing down by -5.28% (worst performance ever for an Inauguration Day) as concerns over the banking system spilled over. The gloomy feel has carried over to today's trading, with Asian regional indexes all lower and European stock futures pointing to a lower opening. In this context, we expect safe haven trades, such as the Usd, Jpy and Chf to outperform.

Yesterday, the BoC cut its interest rates by 50bp to a 50-year low of 1.00%, as was expected. The central bank signaled that additional easing was highly probable, but stated that events would be monitored attentively 'to what extent further monetary stimulus may be required'. We expect CAD to remain under pressure and forecast a move to 1.30 mid- term.

Tuesday releases showed a slight rise in German ZEW index in January, with the headline economic expectations index rising from -45.2 to -31.0. This tick up suggests that the newly announced fiscal support has provided a glimmer of hope. However, we need to take this figure with a bit of skepticism since the ZEW expectations index has failed to be a reliable gauge of German GDP growth in the past. The more accurate indicator, the IFO index, has continued to collapse.

Today, New Zealand retail sales came out better than market expectations. The headline retail sales were flat in November, while ex-auto retail sales were higher 0.3% m/m. We expect the RBNZ will slash rates by 100bp at their meeting next week, since the slight bounce in core retail sales was due to rising food prices and not the result of stronger demand.

In Asia, Singapore's 2009 GDP growth forecast revised to a scary -5% to -2% after +1.7% growth in 2008.

In this light calendar day, European trading will be focused on the UK November's unemployment and public sector net borrowing data. Unemployment is starting to mount at a worrisome pace, but all indications are that the worst is yet to come. With claimant count jumping by 75k in Nov and GDP falling to 1% in Q4 there is little doubt deterioration in the labor markets will continue. Public finances have gone from bad to terrible and that's not what debt holders want to hear right now. We expect the Sterling to continue to come under significant selling pressure