Market in holding pattern ahead of FOMC, major Obama speech.

FX Update: Market in holding pattern ahead of FOMC, major Obama speech.

Market comment
The market is still on tenterhooks as the USD Index has paused before its 200-day moving average and equities try to decide if they want to make a rally attempt or continue the recent sell-off. Even US bond yields are at an important retracement area, where it’s time to decide whether the old sell-off is merely consolidating, or whether we renew the sell-off and have a go at higher levels. As we mentioned yesterday, it feels like markets are at some kind of pivot point here and the next few days could set the tone for the next major leg in market action for risk and the major currencies.

The tail risk from Bernanke’s reappointment is clearly fading rapidly as it now appears the votes are secured and the Senate may vote already tomorrow to confirm him for a second term. It is interesting that risk has not found more support on this, possibly because it is clear that the Obama administration is going to be launching strong new efforts at throwing its weight around in the financial services sector and in addressing the issue of public finance to gain more credibility on the issue.

New Euro pain from the P.I.G.S.?
Nouriel Roubini, the controversial Dr. Doom who did an excellent job of predicting much of the coming crisis in 2008, but who has since become more than controversial, was out trumpeting worries about another of the EuroZone P.I.G.S weaklings (Portugal, Italy, Greece, Spain – though this silly acronym should include Ireland and Austria (the latter on any renewed CEE problems) as well, so perhaps the acronym ought to be P.I.I.G.S.A.) – namely Spain. Mr. Roubini believes that problems in Spain’s and the other Euro “periphery” states’ economies could eventually trigger a demise of the single currency some years down the line. After all, Spain is the EuroZone’s fourth largest economy and has the highest debt to GDP ratio in the EuroZone, worse unemployment than Greece, and even weaker banks. On that latter note, the Spanish bank BBVA was out reporting shockingly bad results. Could Spain already become the next thorn in the Euro’s side?

If we have a look over at the debt spreads, Greek spreads have blown out to well over 300 bps again, the widest level ever. So the support on the Greek debt auction yesterday seems to have been very fleeting and the Euro is still having a hard time rallying against any other major currency. Greece has apparently been out begging China for a large loan to get it through its debt crisis. If we look at the other spreads, the spread on Spanish vs. German 10-year debt is still well below 100 bps, though it has been widening considerably of late. See the chart below.

The pound won’t stay down
Just a day after we built an argument for why the pound might weaken again, it rebounded strongly on continued pain in the EuroZone and rhetoric from the BoE’s Sentance, which had a very different spin on inflation than recent rhetoric from King’s recent shoulder shrugging on the issue. Though Mr. Sentance has already been branded an inflation hawk, the news flow put the pound back on the rally track vs. both the single currency and the USD, GBPUSD is now a confusion of three radical direction changes in three days. Buyers and sellers beware! The pound bulls apparently decided to ignore the very weak CBI retail sales data.

Looking ahead.
The FOMC meeting is up late today in the NY session. Will Bernanke and company try to keep a rather low profile this time around due to the flap around Bernanke’s reappointment? Considering the recent data flow, it is hard to find anything positive that the Fed can grasp onto to build an argument for moving tightening expectations forward.

The more interesting event later in the day is likely to be President Obama’s first State of the Union address starting at 0200 GMT. He is promoting a combination of public austerity and tax breaks for the middle class. It is clear that Mr. Obama needs to shake things up after the Democrats spectacular failure in the Massachusetts Senate race and on the health care issue. Many suspect that heads will roll in the administration, with Treasury Secretary Geithner in perhaps the hottest seat. With populist outrage at the financial sector running very high, risk appetite is worried about a further backlash against banks.

Economic Data Highlights

• US Weekly ABC Consumer Confidence rose to -48 vs.-45 expected and -49 last week
• Australia Nov. Westpac Leading Index out at 1.0% vs. 0.4% in Oct.
  Japan Dec. Adjusted Merchandise Trade Balance out at ¥523B vs. 633B expected and 517B in Nov.
• Japan Dec. Merchandise Trade Exports rose 12.1% YoY vs. 7.6% expected and -6.3% in Nov.
• Australia Q4 Consumer Prices rose +0.5% QoQ and 2.1% YoY vs. 0.4/2.0% expected and 1.3% YoY in Q3
• Sweden Dec. PPI rose +0.2% MM and fell -0.8% YoY vs. +0.3/-0.7% expected, respectively and vs. -1.7% YoY in Nov.
• UK Jan. CBI Retail Sales out at -8 vs. -2 expected and 13 in Dec.

Upcoming Economic Calendar Highlights

• US Dec. New Home Sales (1500)
• US Fed's Greenlee to Speak on Commercial Real Estate (1500)
• US Treasury's Geithner to Testify (1500)
• US Weekly DoE Crude Oil and Product Inventories (130)
• US FOMC Rate Decision (1915)
• New Zealand RBNZ Official Cash Rate (2000)
• UK BoE's Haldane to Speak (2115)
• Japan Dec. Retail Trade (2350)
• US President Obama’s State of the Union address (0200)