EURJPY meltdown continues on weak equities and ECB growth concerns. EURUSD: Are we seeing a change of trend to a stronger dollar

EURUSD breaks first key support as US on holiday today.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• ECB's Wellink said over the weekend that EuroZone growth may be closer to 1.5% than 2.5%
• UK Jan. Rightmove House Prices out at -0.8% MoM and +3.4% YoY
• Australia Q4 Producer Price Index rose 0.6% vs. 1.1% expected
• Germany Dec. Producer Prices fell -0.1% vs. +0.2% expected.

THEMES TO WATCH – UPCOMING SESSION
Key event risks today (all times GMT):

• US Markets Closed today for Martin Luther King, Jr. Holiday
• Switzerland Dec. Producer and Import Prices (0815)
• UK Dec. BSA Mortgage Approvals (0930)
• Canada Wholesale Sales (1330) 

Market Comments

We were looking for a possible short-term relief scenario for some of the carry trades Friday as a bounce had developed in these trades on a equity buying out of Asia despite a weak US session on Thursday. Europe followed through with a sharp intraday rally. But then Friday's US session really underscored the inability for any optimistic mood to hold in this environment, as Bush's big stimulus plan - some USD 150 billion, was met with a collective shrug of the shoulders and the sell-off resumed in force. This immediately put the carry trades on the defensive. Market commentators are already trumpeting the start of the year in US equities as potentially the worst ever - just for a bit of perspective on how bad things look out there. We'll be hesitant in trying to call the next rally in carry trades, but judging from past behaviour of this trade's price action, it will likely come after a climactic spike to the downside.

The usual suspects, JPY and CHF, were the strongest performers on Friday and overnight, and EUR and AUD were the weaklings. As long as the fear levels remain this high for risky assets, the carry trades will find little support. 150.00 is the next big level in EURJPY.

EURUSD headed back toward 1.4590 support and then opened Monday with a strong fall through this level after Wellink's warning words on growth over the weekend. This reinvigorates the USD bullish "recoupling" trade idea (the weak USD move was largely attributed to the decoupling tendency of the US economy vs. the rest of the world - now the catchphrase is "recoupling", i.e., the idea that, in a global economy, no significant region can experience a big slowdown withouth dragging the rest of the world into the void.) The overnight break looks very significant in terms of the overall USD trend if it holds over the next few sesssions as the 55-day SMA has been crossed in the dollar index and US/Emerging market pairs are rallying strongly. Chinese growth data may have special significance on Thursday for the recoupling theme, as a global slowdown ought certainly to affect China as well, with its exports comprising nearly 40% of GDP.

It also looks like decision time for USDCAD, with the BOC announcement up tomorrow and the market pricing in a 25 bp cut there. 1.0340 is an important resistance area that, if broken, could lead to a try toward 1.0850.

Calendar comments for the week ahead: A few events to keep in mind as you consider what to trade:

• USA: a light for the US this week, with Existing Home Sales the only data point of interest (Thursday).
• Canada: Dec. Retail Sales and the BOC rate announcement tomorrow, with a 25 bp cut expected. Canada Dec. CPI will also be released Friday.
• EuroZone: The big focus for the week will be the German IFO on Thursday. The IFO has been trending down since the spring of 2007.
• UK: UK CBI Industrial Trends and a speech from the BOE's King tomorrow. On Wednesday, we see the BOE minutes for the last meeting a first go at Q4 GDP. And on Thursday, we get Mortgage data. 
• Australia: CPI on Wednesday. Some say this is key for the persistent view that the RBA will hike one more time in the near future, so a weak CPI number could kick the AUD sell-off into full gear
• Switzerland: Retail Sales tomorrow
• Japan: BoJ tonight (Asian Tuesday) - obviouslsy no change expected and little impact for the even specifically, though we always need to watch the press conference. Friday sees CPI data.
• New Zealand: RBNZ on Thursday (Wednesday evening for us in Europe) - no change expected.

Chart: EURUSD

EURUSD: EURUSD has a dominant weight in the US dollar index, and broke through key levels this morning - including the 3-week low (flatline support)around 1.4590 and firmly moving lower after crossing the 55-day moving average last week. Looking at the FIbonacci picture, the next key support if the pair holds lower is the 1.4350 area where the pair found support on the last sell-off. Below that, there's not much to speak of until the 1.4000 area.