Market remains in white-knuckle mode ahead of possible 100 bp cut from the Fed.

Run in commodity prices finally broken yesterday. Any consequences for currencies if oil and gold continue lower?

MAJOR HEADLINES – PREVIOUS SESSION
Overnight developments:

• US Mar. NAHB Housing Market Index held steady at 20 as expected
• Japan Feb. Nationwide Department Store Sales rose 0.9% YoY vs. -2.1% in Jan.
• Japan PM Fukuda nominates new candidate to BoJ (Koji Tanami) who the opposition may also refuse to approve

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

• Switzerland Q4 Industrial Production (0715)
• UK Feb. CPI and RPI (0930)
• Canada Feb. CPI (1100)
• US Feb. PPI (1230)
• US Feb. Housing Starts and Building Permits (1230)
• US FOMC Rate Decision (1815)
• US Weekly ABC Consumer Confidence (2100)
• Australia Jan. Westpac Leading Index (2330)
• Australia Q4 Dwelling Starts (0030)

Market Comments

Bernanke's fight to save Wall Street from itself and the legacy of Greenspan is set to continue today with a likely 100 bps cut this evening from the FOMC. As a sign of the ongoing demand for safe and liquid places to park funds yesterday, US 3-month T-bills briefly traded below the 1.00% level for the first time since the 1950's. The rate differentials continue to see USD rates tumbling relative to Europe at the shortest end of the curve, but we are rapidly reaching the "zero bound" for this phenomenon. And looking at 2-year rates, we note with interest the very large drop in German 2-year yields, which fell faster than their US counterpart yesterday. This is likely to continue as US 2-year yields have only 135 bps before reaching zero, while German rates, at 295 bps from zero, have much more room to fall. Whether today's FOMC comments will confirm that we have seen the top in EURUSD, we refuse to guess, as another spike or two to the upside to a price of your choice is easily possible on ad hoc event risks and lack of liquidity, but USDJPY may still have much farther to go on its southbound sojourn and EURJPY may tag along for the ride soon. Many are talking up the idea of intervention, but considering the feeble verbal intervention from Trichet and co. yesterday, real intervention doesn't look imminent.

Elsewhere, commodities finally saw a correction yesterday, as Gold pulled back about 30 dollars from its highs and crude oil sold off as much as 8 dollars from new highs yesterday. While we can understand the recent rally in gold on fears of a competitive currency devaluation in this environment, the rally in energy of late is less compelling from a fundamental perspective (a fancy was of saying "it's downright irrational") considering the extremely bearish supply situation in the US and signs of faltering demand. Regardless, it appears that commodities are moving as a complex. Yesterday's sell-off may be marking the beginning of the end of the commodity-rally-as-a-product-of-a-weak-USD story and is likely to have negative implications for the likes of the "other dollars". We would suspect that NZD is the most vulnerable of the lot considering its absurdly large current account deficit at -8.3% of GDP. NZDUSD should be trading closer to 0.7000 than 0.8000 right now and don't even ask about NZDJPY.

The one market phenomenon that really defied belief was the move in equity markets yesterday. The kneejerk adage that markets "climb a wall of worry" simply smacks of complete denial in this environment. How can equities rally into the close in these circumstances with panic showing everywhere else, whether in the US treasury complex or in credit markets? Is the market really anticipating salutary effects from another impressive move by the Fed after the last 225 bps of neck-breaking easing have failed to generate any signs of hope? Is the market really a leading indicator for happy days ahead? In any case, the miraculous resilience in equities managed to halt the slide in the JPY crosses yesterday and the reaction to tonight's FOMC announcement will likely decide whether equities can continue to play this game of denial or whether we are finally set to see the long overdue capitulation that will also usher JPY crosses even lower. Watch for earnings reports from Lehman and Goldman Sachs today as well, as investment banks are in the spotlight, to say the least, after the vaporization of Bear Stearns over the weekend. The only guarantee here would seem to be plenty of volatility.

Two USD crosses to watch closely today: GBPUSD as it flirts with the very key 2.0000 area and USDCAD as its first attempt above 1.0000 was rejected yesterday.