Risk appetite still a key USD driver it seems, regardless of FOMC outcome today.


* US Weekly ABC Consumer Confidence out at -47 vs. -48 expected and -48 the previous week

* Japan BoJ left Target Rate at 0.10% as expected

* Switzerland Jan. Retail Sales rose 1.2% YoY vs. 3.6% in Dec.

* UK Feb. Jobless Claims Change was +138.4K vs. 84.8k expected

* Canada Jan. Wholesale Sales fell -4.2% vs. -2.7% expected and -3.1% in Dec.

* US Feb. CPI rose 0.4% MoM vs. 0.3% expected and ex Food and Energy rose 0.2% vs. 0.0% expected

* US Q4 Current Account Balance out at -$132.8B vs. -$137.1B expected


* US Weekly Crude oil and Product Inventories (1430)

* US FOMC Rate Decision and Monetary Policy Statement Release (1815)

* Australia RBA's Edey to Speak (2050)

* Australia Q1 Westpac-ACCI survey of industrial trends (0000)

* Australia Q4 Dwelling Starts (0030)

* Japan BoJ Monthly Report (0500)

* Japan Feb. Department Store Sales (0530)

The Jobless claims number in the UK rocketed to a record 138.4k, by far the worst tally since record keeping for claims began in 1971. The prior month's data was also revised upward by almost 20k, so it puts the total tally of lost jobs at about 158k, about equivalent to a US nonfarm payrolls drop of 800k, if we adjust for the UK population size. This terrible number comes as German interest rates have risen sharply in recent days, a combination that is putting enormous pressure on the pound, where the market will look for the BOE to step up its unconventional monetary policy efforts while yields look more attractive elsewhere. The latest move saw EURGBP pulling above 0.9300 again, to the highest levels since a run to 0.9500 in late January. The BOE minutes also show an aggressively dovish posture by the BOE, with a willingness to step up gilt purchases if the first round was not having the desired effect.

In other economic news, the Bank of Japan left its 0.10% rate untouched overnight, but announced a stepping up of government bond purchases from banks and a new infusion of capital into the private sector in the form of ¥1 trillion in subordinated loans to banks. The US CPI number was out higher than expected and makes the deflation argument a bit tough at the moment, especially as oil has moved back toward the 50 dollars a barrel level and with US PPI core prices still at elevated levels. The US Q4 current account deficit was the smallest in five years as the world continues to unwind global imbalances.

Besides the sharp move in the pound, the market was treading water earlier today. But then just after the US inflation data, EURUSD spilled above the 1.3100 area resistance on possible stop running before the main event: the FOMC monetary policy announcement. The uncertainty surrounding this event is pronounced and adding to the potential for volatility, as almost any outcome represents a surprise with no strong consensus on what the Fed will have to say. There is a menu of options available for the Fed to choose from in the quantitative easing category and we are likely to see some kind of policy statement adjustment showing the Fed is doing all it can to further ease credit pressures and support the economy. Most, including us, consider it unlikely for the Fed to move to all out debt monetization via treasury buying at this time and instead look for increases of existing efforts and possibly the signaling of moves like those made by the Bank of Japan recently, which has moved to outright purchases of corporate debt. If the Fed decides to leave well enough along today (i.e., staying the course and underlining hopes for current programs and the TALF launch), this is supportive of the dollar, all else being equal (see below paragraph for what all else entails....). If the Fed announces new QE measures short of treasury buying and/or if treasury buying is mentioned in such a way that suggests the Fed is raising the odds for a move in that direction, this is the more USD bearish outcome.

Overall, however, it still seems that the weaker USD is a reflection of elevated risk appetite. Emerging market currencies are storming back, bund yields are higher, the VIX is down touching its 200-day moving average for the first time since the weeks before the demise of Lehman Brothers. And gold continues to tumble to new multi-day lows despite the falling dollar of the last week. Our conviction is that eventually, strong risk appetite is misplaced, but the timing of a return to risk aversion is the big question as we are so close to big intermarket pivot levels. A spillover higher in US 10-year notes on a less dovish than expected Fed, for example, and continued rally in equities in the short term, and we could have EURUSD testing that 200-week moving average toward 1.3375 rather quickly. As long as USD weakness is associated with risk appetite, however, the potential for a comeback further out remains high.