The US Dollar gained ground on the Yen, and made temporary gains against the Euro before ending pretty much flat for the session. As the Nikkei cruised to its ninth out of ten positive sessions, USD/JPY made nice gains from early session lows of 93.26 to reach highs of 94.13 before exiting the session near 94.00. EUR/JPY whipped around from a 125.78 low to highs just over the 27.00 figure. The Nikkei also reported today that the Japanese Government would look to scrap the 40% capital gains tax for foreigners holding Japanese companies in funds for 2009.

The EUR/USD pair weakened early to 1.3431, but came clawing back to highs of 1.3540ish before walking into the data loaded London session near the 1.3500 figure. The overall elation in the markets over the upcoming Presidency of Barak Obama has helped to elevate the Dollar, but the question will be how long can that elation last? Today in London we have a good deal of pertinent data including German employment and Euro Zone PPI.

Upcoming Economic Data Releases (London Session):

1/7/2009	7:00	GE	Wholesale Price Index (MoM)	DEC	-3.30%	-1.70%
1/7/2009	7:00	GE	Wholesale price Index (YoY)	DEC	-0.80%	-2.00%
1/7/2009	7:00	GE	ILO Unemployment Rate	NOV	7.10%	7.10%
1/7/2009	8:55	GE	Unemployment Change (000's)	DEC	-10K	10K
1/7/2009	8:55	GE	Unemployment Rate (s.a)	DEC	7.50%	7.50%
1/7/2009	10:00	EC	Euro-Zone PPI (YoY)	NOV	6.30%	4.50%
1/7/2009	10:00	EC	Euro-Zone PPI (MoM)	NOV	-0.80%	-0.90%
1/7/2009	10:30	UK	BRC December Shop Price Index (Table)	7-Jan

The buck gave up overnight gains in NY trading as a poor batch of US economic data and the FOMC meeting minutes dealt the market a fresh dose of reality.  The ISM services index was the lone positive surprise, coming at a still dismal 40.6 in December after a paltry 37.3 print the prior month.  Factory orders for November, however, were worse at -4.6% and the key capital expenditure measure that feeds into GDP was revised lower, to a horrendous three-month annual run-rate of -28.0%.  Pending home sales also disappointed by registering a sharp -4.0% decline in November, in an ominous sign for home sales in 1Q 2009.

The FOMC meeting minutes were no better.  Members continue to harp on the significant downside risks to economic growth while noting appreciable reduction in inflation metrics.  Some members even went as far as acknowledging that the contraction in activity will be prolonged.  Given that the Fed now has run out of bullets on the rates front -- effectively cutting the target to 0% -- we would not be surprised to see other efforts to pump liquidity into the market such as direct purchases of Treasury securities in the near future.

EUR/USD rocketed 200 pips from the NY open and was sitting near 1.3530 as trading came to a close here.  Trendline resistance near 1.3570/80 looks like the next barrier to upside and a break above there should see the move extend into the 1.3650 zone next.  Cable caught a mammoth rally as GBP/USD shot up more than 350 pips towards the 1.4920/30 area.  The pair made a high just below the 1.50 mark and this looks like the next hurdle for any move higher.  We would expect especially volatile price action here as the Bank of England meeting looms later this week.

Upcoming Economic Data Releases (Asia Session) previous  forecast

1/7 0:01 GMT UK Nationwide Consumer Confidence DEC 50 - -

1/7 0:30 GMT AU Retail Sales Trend (MoM) NOV 0.20% - -

1/7 0:30 GMT AU Retail Sales s.a. (MoM) NOV 0.70% - -

1/7 1:00 GMT AU HIA New Home Sales (MoM) NOV 4.50% - -

1/7 1:00 GMT NZ Westpac McDermott Miller Employment Confidence Index 7-Jan  

1/7 2:00 GMT NZ Commodity Price Index for December 7-Jan

It was a dose of déjà vu in the London session as, much like yesterday, the euro was pummeled.  The big number out of the eurozone was the consumer price estimate for December and it came in below expectations at 1.6%, and is a sharp decline from the 2.1% run-rate in November.  This leaves the door wide open for the ECB to cut rates in size later this month as the inflation argument continues to become less compelling.

EUR/USD was crushed more than -150 points in London trading and was sitting near the session lows by 1.3310/20 just ahead of the NY open.  Expect accelerated weakness here if we get below the 1.3250 level.  EUR/JPY was likewise lower and the pair slipped more than -70 pips towards the 1.2520/30 zone. 

Crude oil prices continued their upward climb and broke decisively above $50/bbl resistance.  This helped fuel another dip in USD/CAD, which shed about -80 pips to the 1.1890 level.  Geopolitical tensions remain the primary driver here and we would not be surprised to see oil prices come off sharply once this subsides.  For now, the 1.1820 mark in Loonie is critical support.

Upcoming Economic Data Releases (NY Session)  previous  forecast

1/6 13:30 GMT CA Industrial Product Price MoM NOV 0.00% -1.00%

1/6 13:30 GMT CA Raw Materials Price Index MoM NOV -12.50% -9.00%

1/6 15:00 GMT US ISM Non-Manf. Composite DEC 37.3 37

1/6 15:00 GMT US Factory Orders NOV -5.10% -2.20%

1/6 15:00 GMT US Pending Home Sales MoM NOV -0.70% -1.00%

1/6 19:00 GMT US Minutes of Dec. 16 FOMC Meeting 6-Jan