March Existing Home Sales declined significantly dropping to a 4.57M versus expectations of 4.65M annual run rate. The decline was materially worse than the 4.71M figure for the month of February. Median price of a home fell by 12% from the year prior to $175,000. The news put a damper on equities and risk appetite as investors were anticipating a much more benign decline.

Currencies and equities have strengthened across the board suggesting that risk appetite may be improving. The dollar, which has been a refuge for safe haven flows, fell against all of the major currencies except for the Japanese Yen. In fact, the rally in USD/JPY has been voracious with the currency pair rising 2.5 percent to an 11 week high. The move today has been driven by a variety of factors, none of which in our opinion are meaningful enough to sustain the rally.

The US dollar continues to rally against the Japanese Yen (USD/JPY) despite pessimistic comments from Federal Reserve Chairman Ben Bernanke and weaker US economic data.

Based upon the price action in the currency market, one would assume that risk appetite is improving. However, if you took a look at the sell-off equities, it suggests otherwise. Over the past few months, there has been a strong correlation between these two instruments with equity market weakness driving USD/JPY lower. Unfortunately this correlation has decoupled today, leading currency traders to wonder which asset correctly reflects the market’s appetite and why there is a decoupling.

The US dollar soared to a 6 week high against the Japanese Yen after President Obama announced a $75 billion foreclosure prevention program. This breaking news came less than an hour after housing market data hit record lows.

An update to this morning's technical report as wicked volatility follows Geithner's Financial Stimulus Plan roll-out...

On Friday, the Bureau of Labor Statistics is expected to tell us that US employers fired another 500k people in the month of January. Surprisingly enough currencies and equities are trading higher ahead of the non-farm payrolls report which suggests that traders are not afraid of a bad number. Everyone knows that the US economy is very weak and major job losses will continue. Since traders are becoming immune to bad data, it may take job losses in the area of 600k to spook them (January Non-Farm Payrolls Preview). Instead, traders are looking beyond Friday’s non-farm payrolls report to the Monday, February 9th speech by US Treasury Secretary Timothy Geithner. According to a Treasury official, Geithner is expected to unveil a bank rescue plan next week. This is one of the few things that could strike a meaningful recovery in the currency and equity markets. If traders deem Geithner’s plan as satisfactory, we could see a further recovery in the financial markets despite the fact that the US economy will get worse before it gets better.

The US dollar is stronger across the board today as risk aversion returns to the market. Like Florida weather, where it can be hot one day and cold the next but warm most of the time, we can occasionally see an improvement in the market’s risk appetite but the bias is still towards risk aversion. Traders have quickly realized that nothing new came out of the Fed’s monetary policy meeting yesterday and until we have another major announcement from the US government, currencies will be vulnerable to negative US economic data, earnings report and developments abroad.

The Federal Reserve is currently holding a two day monetary policy meeting and it will be interesting to see whether they are desperate enough to introduce radical programs that can incite the enthusiasm of investors. With interest rates virtually at zero, a rate cut is not expected, but the central bank is under pressure to take further action. So far, their effort which includes 500bp of easing has helped to prevent the recession from turning into a depression but it has yet to stabilize the economy. The latest string of economic data indicates that the US economy is still on a downtrend and headed lower. The FOMC rate decision tomorrow could be a nonevent for the US dollar, but if the Federal Reserve is desperate enough, they still have the power to surprise the markets.

There has been a lot of volatility in the foreign exchange market this morning, driving currencies to historic levels:

The USD/JPY is shaping up to be the trade of the Q1...

The US dollar strengthened across the board today following better than expected economic data and more clarity from the Federal Reserve on their plans to stimulate the economy going forward. However the strength of the greenback could be fleeting particularly against the Japanese Yen as the upside surprises in US data masks underlying weakness. The December retail sales report is due for release tomorrow. Even though there is a chance that we may see an upside surprise, consumer spending is still expected to be negative for the sixth consecutive month.

It is a new trading week and growing doubt about the global economy has seeped through the financial markets once again. For the foreign exchange market, we are seeing broad based liquidation or weakness in all of the major currency pairs. The concerns are not unique to the US economy which is why we have not seen any consistent behavior in the US dollar. The greenback weakened against the Japanese Yen but it rallied against the Euro, British pound and the commodity currencies. For currency traders who simply have a view on the US economy and nothing else, the price action of USD/JPY has been best aligned with the trend of the US economy. All of the other currency pairs are diluted by speculation about upcoming interest rate decisions and commodity prices.