FOMC rate decision on tap with 50 bp cut expected. First reading on US Q4 growth also to be released.

Continued US housing implosion likely to lead to a 50 bp cut today, but the market already expects this.

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• New Zealand Dec. Building Permits fell -5.2% vs. 0.0% in Nov.
• US Weekly Consumer Confidence fell to -27 vs -24 expected and -23 the previous week
• Japan Dec. Industrial Production rose 2.0% vs. 1.4% expected

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

• Norway Dec. Retail Sales (0900)
• EuroZone Jan. Retail PMIs (0900)
• UK Dec. Mortgage Approvals (0930)
• Switerland Jan. KOF Swiss Leading Indicator (1030)
• US Jan. ADP Employment Change (1315)
• US Q4 GDP - First Estimate (1330)
• US Weekly Crude Oil and product inventories (1530)
• US FOMC Rate Decision (1915)
• New Dec. Zealand Trade Balance (2145)
• Japan Dec. Housing Starts (0500)
• Japan Jan. Small Business Confidence (0500)

Market Comments

The waiting game continues as indecision has sapped the FX market of momentum. The US data and Fed decision are supposedly hotly anticipated: the GDP expectations are a paltry 1.2% after the previous quarter's ludicrously high 4.9% (due likely to over-optimistic inflation estimates). Either way, only a shocking growth number (something dangerously grazing 0%) would seem to offer a trigger for any action upon release. 

On the FOMC meeting, there's plenty of noise out there on the Fed possibly moving only 25 bps versus the more widely expected and priced in 50 bps. A fresh review of the housing data, and the likes of yesterday's CaseShiller Housing Index number, which showed a year-on-year drop in House Prices of -7.7%, would seem to seal the case for the 50 bps cut. Confidence indicators are also nosediving, with yesterday's weekly ABC number only a point from the low seen at the beginning of the Iraq war (which was the lowest level since 1993). Certainly the biggest surprise potential today would be a cut of only 25 bps for the fed - stocks would go into a freefall if it doesnt get its 50 - yet another reason that Bernanke and co. are ready with the big machete again this time around. Also watch the US ADP employment change number, which did a good job of predicting the weak US employment report last time around.

As always, the reaction to the data will give us our next read on market psychology - and we fear that the market may be on the couch for a while to come, though we do fervently hope for decisive action today. Again, our background view is that the market eventually comes around to a reverse psychology on rates - the recoupling scenario. In this scenario, the US downside is already very apparent and the Fed is doing something about it, while the rest of the world is only just beginining to stall and will eventually meet the US fate to a greater or lesser degree. This is a USD bullish view - but again, we have no technical case for this view just yet, as the key USD pairs are embedded in ranges at the moment. Let's see if the next couple of days can alter the technical setup.

As far as the risk outlook (which is driving virtually everything at the moment, as FX continues to look at equities/risk for direction): The glass-half-full people are looking for equities to rally based on history repeating itself - the old stimulus-leads-to-a-quick-recovery routine, which is what we saw in 1991 and 2001. The glass half empty people say that the Fed is "pushing on a string", that the economy actually needs to take a hit to address the egregious imbalances that have built up due to excesses of the past and that this will take some time. More milk, please! Watch the JPY again if equities renew their slide...

Charts: NZDUSD

NZDUSD is a non-trending mess, as the market tries to sort through the market themes. Trend followers are getting burned at every turn as false breakouts abound. This pair has rallied very sharply after spiking to 0.7400 - but is it yet another false dawn and should we expect another sell-off here at today's inflection point?