FX Closing Note: Risk balloons further - but who is Kocherlakota?

Today's US session saw a strong further surge in . We smelled the potential for a EURUSD reversal higher recently as described in yesterday's technical look  at EURUSD. The longer term pressure on the EURUSD is not necessarily over with, but it is clear after a day like today that the market may have gotten ahead of itself in pricing in the Euro's woes and that some kind of consolidation is in order, whether it is a modest affair back toward the 1.3850 area or a more extensive new bout of USD weakness that takes us back above 1.4000 briefly, or even all the way back for a test of the 200-day moving average that comes in above 1.4350. We suspect that last figure is excessive, but clearly the market was recently over-positioned of late on this story.

Who is Kocherlakota and why should we care?
The Fed's new man on the block - Narayana Kocherlakota, the newly minted president of the Minneapolis Fed's (took the post in October of last year and delivered his first speech today), today gave a speech that contained a bit more pointed comments on the economy and monetary policy than one might expect from you run of the mill Fed president, and certainly from such a green face on the Fed scene. (Click here for full text of his speech:)

Mr. Kocherlakota pronounced rather bleakly that US employment conditions are still very worrying, especially the hiring rate, even if the firing rate has diminished. He has "yet to see evidence" that the hiring rate will move higher in the immediate future. He also discussed the means by which the huge amounts of government debt will be paid back ("This debt can only be paid by tax collections or by the Federal Reserve's debt monetization - that is, by printing dollars..." Mr. Kocherlakota still expects the recovery to move forward, but expects 3.0% growth next year, slower than private sector estimates. Overall, his words were rather dovish.

Around the time of Mr. Kocherlakota's speech, bonds launched a rather steep and persistent rally for the rest of the US session, a rally that is a in jarring contrast to the huge move higher in risk instruments like equities and (usually positively correlated with risk as of late) especially commodities. In FX, traders were so fixated on the normal negative risk correlations with the USD and especially the JPY that both currencies weakened. But a weaker JPY in the face of a significant bond rally is an unusual thing, so this divergence bears close watching and is a warning sign for JPY bears if it bonds are able to maintain support and yields fall further.

Mr. Kocherlakota's voice is a suddenly interesting new one on the Fed scene and bears watching in the future after today's performance. He is scheduled to become a voting member of the FOMC next year.

Chart: USDJPY
The USDJPY chart continues to skate along within the Ichimoku cloud on the daily chart and just under the 55-day moving average (strong red line in chart below). Today's rally attempt was beaten back by a strong rally in US treasuries.

Looking ahead
As pointed out this morning, AUDUSD was nearing key resistance at the 55-day moving average after having blasted through lower Fibo retracement levels earlier in the day and is essentially closing on that MA today. Risk remains the name of the game, as does keeping an eye on which market gains the upper hand in influencing the Yen's direction, risk or interest rates. On the economic data front, we can look forward to the weekly US ABC Consumer Confidence data today. On tap tomorrow we have the BoE minutes, US Jan. Housing Starts and Building Permits, US Jan. Industrial Production and Capacity Utilization, and the FOMC meeting minutes.