FX Closing Note: Risk appetite continues to wilt

US equities attempted a small comeback today after yesterday's depressing kick-off to the corporate earnings season, but other earnings news streaming in today failed to generate enthusiasm and they dumped lower into the close. Adding to the negativity may be the Obama administration's announcement that it is considering levying a special tax on banks that were bailed out in an effort to cut the fiscal deficit and recoup some of the cost of the bailout. This is clearly an attempt at damage control from public outrage as the big banks are soon set to announce their bonuses .

Significantly, commodities also joined the risk sell-off. Crude oil sold off as warmer weather is sweeping across the US again after a recent cold snap that saw temperature records falling across the nation. Gold plummeted more than twenty dollars today as an official at China's CIC sovereign wealth said that gold is too expensive and stated that the lows are in for the USD.

China is increasingly worried about its potentially overheating economy and announced another credit constriction attempt by raising bank's reserve requirements today.  A debate is raging concerning the degree to which the Chinese economy faces a bubble in asset markets. Not so long ago, the impressive Jim Chanos weighed in on the issue (the famed short seller believes China is in a bubble state), while a Forbes article out yesterday specifically rebutted Chanos' claims. None other than the famous China cheerleader Jim Rogers has also put down Chanos' claims, saying that Chanos is a China neophyte that couldn't spell China 10 years ago.

Technical and other developments
USD - the USD was rangebound vs. the Euro and slightly weaker vs. the pound, but saw reasonable gains against the higher beta risk currencies. The performance was actually relatively solid considering the successful conclusion of the latest US treasury auction and the market likely expecting that tomorrow and Thursday's auctions of 10-year and 30-year debt will also go well. (By the way here's a handy link that shows the dates for upcoming treasury auctions, an important thing to track this year with all of the heavy public issuance.

AUD - looking very shaky suddenly on the move to risk aversion and the sharp sell-off in gold. Further downside is certainly a possibility if risk continues to turn tail, which would abort any full attempt by AUDUSD to have a go at a double top. Thursday's employment report is a big test of the situation as well.

Chart: AUDJPY
JPY crosses very much in focus at the moment with bonds rallying and risk selling off. Friday's hanging man in AUDJPY wasn't much of a signal for yesterday's action, but today saw a very steep sell-off. Interesting that this sell-off comes after an attempt at attempt at a new 15-month high.

JPY - swooped sharply stronger across the board on the trifecta of weak commodity and equity markets (and therefore weak higher risk currencies) and strong bond markets. USDJPY is fast approaching a key support area we mentioned in this morning's report at 90.00.

EUR - is performing relatively well as it has become a bit more negatively correlated than previously with risk appetite - rising sharply vs. the AUD, for example, over the last couple of days.

CAD - pulls higher through the weekly pivot at 1.0375, an interesting swing level for the rest of the week. Short term vulnerability in CAD with combination of sharp energy market consolidation

NOK - we finally see a bit of a rally in EURNOK with oil dumping today - it would seem short term risk remains to the upside, though we have to watch out for Thursday's ECB meeting.

Chart: EURNOK
EURNOK nodded its head at the oil sell-off over the last couple of days, further short term upside may be in order here as the sell-off has been long and persistent and we are headed into a major inflection point on Thursday with the ECB meeting.

Looking ahead
Some interesting vibes coming from the intermarket action today, where risk looks a  bit shaky all of a sudden after day after day of upside in equities. It would seem that the potential for volatility expansion is high. This would play most to the Aussie and Kiwi's detriment. Be careful out there as always.

FX Closing Note: CAD cries Wolf

Market action
The greenback remained on a weak footing for most of the NY session, as US treasuries tread water and equities sold off and then rebounded slightly. The JPY firmed on weaker risk appetite and finally noticed firmer Euro Bund prices that it ignored in the European session. CAD was the day's weakling as the Bank of Canada's David Wolf came out with a number of CAD-negative broadsides and as oil prices cooled sharply after posting new 15-month highs today.

Technical and other developments
USD - generally lower today, but most losses occurred in Asia, with no real follow through in later trading. AUDUSD is less than a figure off of its low for the cycle as this throwback rally is doing a full test of the top of the old rally, it seems, after all of the Fibo retracements have failed to contain the rally for long. Fitch said that it saw long term risk ("by second half of decade") of pressure on US's AAA rating if the US didn't do something to address its budget deficit over the next 3 to 5 years.

CAD - the Bank of Canada's Wolf said in a speech today that housing market strength in Canada is "striking", that a housing revival is "desirable" and that it is "premature" to suggest that the housing market is in a bubble even if must be monitored. Mr. Wolf said that it was premature to raise rates now. "If the Bank were to raise interest rates to cool the housing market now - when inflation is expected to remain below target for the next year and a half - we would, in essence, be dousing the entire Canadian economy with cold water, just as it emerges from recession." This helped USDCAD reverse from its new multi-month lows.

Chart: USDCAD reversal
CAD was lower across the board today on the oil price decline and Wolf comments. The bullish candlestick comes in just ahead of the old lows for the cycle and may be followed up with more upside in the coming sessions barring a renewed spike in oil.

GBP - lost ground on the Euro again and is closing up close to recent resistance levels. A new downleg for the pound in store here?

Chart: GBPJPY
GBPJPY made an ugly reversal and close on the day (bearish shooting star and outside day, as the JPY sell-off has taken a breather on bond markets that have steadied of late. If risk aversion gets nervous on the first earnings reports in coming days, JPY crosses could see some further consolidation lower.

JPY - bonds are flashing a bit of a warning light here as bonds are continuing to consolidate. The reversal today in the likes of EURJPY and GBPJPY even more so, looks rather compelling for some possible short term strength in JPY (downside for JPY crosses).

CHF - responsed very little to the SNB's warning on intervention. Later, the CHF was a bit stronger as the SNB's Hildebrand

said that if interest rates are kept at the current rate for too long term, it would create problems and that the SNB has begun to withdraw liquidity.

NOK - It would seem that EURNOK is at risk of consolidating on the reversal in oil prices, though the correction there may need to pick up the pace to add serious pressure on NOK after today's higher than expected inflation data. NOK managed to make a comeback after a spike lower early in the NY session

Looking ahead: Earnings season upon us
Besides the usua US corporate earnings are very much the focus with Alcoa traditionally kicking off the earnings season today. Stories abound on whether equities are fairly priced at present and to what degree corporate earnings will improve. The coming couple of weeks will be important for the asset markets as equity traders determine how comfortable they are with the expectations priced into the market relative to the earnings reports rolling in and companies' guidance.

Another question we have for the shortest term is how much the market is willing to bid up EURUSD ahead of Thursday's ECB press conference...

Be careful out there.