The declaration by California's new governor Gerry Brown that the largest US state's economy is in a situation of fiscal emergency has not really gained much traction, but we suspect that as Europe opens it will. The statement was made to force local politicians to deal with the $25.4bn budget deficit, however so far, there has been little reaction in the FX markets. Yesterday's strong US data supported the dollar amid an uninspiring session for equities in the Asian session. However, Shanghais composite was able to pull out of this recent slump (prompted by concerns about the PBoC tightening policy), and rallied 1.42%. US equities closed vaguely negative while Treasury yields advanced, despite falling late in the session. Crude and gold fell to $88.55 and $1349.60, respectively. FX markets were range bound; EURUSD 1.3390-1.3520, USDJPY 82.00-83.10 but interestingly the strong US data print did give the USD a boost especially against the JPY and CHF. Initial jobless claims fell more than estimates to 404k which implies the weaker trend in Q4 has been sustained. US Existing home sales astonishingly jumped 12.3% in Dec to a 5.28 million, the highest monthly print since mid 2010, and the Phil Fed. manufacturing survey slipped down to a still robust 19.3 in Jan. Overall the US data was encouraging and revived the idea that the USD should be considered a growth currency.

The GBP rally due to sudden rate hike expectations seem to be cooling down as yesterday the cable broke below 1.5905, then 1.5880 support. However it was able to rally back above 1.5900 this morning. Today brings us German IFO and UK retail sales; for the GBP, the growth numbers will be crucial especially if they print higher - perhaps hinting that the domestic economy could manage with some inflation fighting tightening. Markets will be watching events in the EU and barring a unseen event this Friday, expect risk correlated trades to rally.

/

/