As we noted, today’s TICs report could prove pivotal to the currency market if it prints yet another negative number. The market is anticipating a rebound to $27 Billion from the prior month deficit of -$43 Billion. However, if the report shows yet another outflow of capital from US for the fourth month out of the past five, it could send tremors through the currency market highlighting the vulnerability of US balance sheet position.

The big story in the financial markets today was not the improvements in economic data, but the improvement in earnings. The health of the financial sector is critical to the recovery in the U.S. economy and therefore investors are keeping a particularly close eye on the reports from the banking sector. In order for the global economy to have any chance of recovering, banks need to stabilize and start turning a profit so they will feel comfortable enough to lend. Therefore the better than expected results from Wells Fargo has been received positively by the equity and currency markets. The U.S. dollar sold off against the commodity currencies and rallied against the Japanese Yen. The dollar also gained strength against the euro and British pound, which is not in line with the improvement in risk appetite because of euro and pound specific reasons that we will discuss further in the respective sections.

For the third night in a row risk aversion flows dominated Asian trade as Nikkei continued to correct its recent gains, but as European trading settled into its morning routine currencies stabilized with EUR/USD recapturing the 1.3200 handle while USD/JPY crawled back to the 100 level. A spate of negative news from Ireland which proposed an emergency budget plan pressured the euro throughout Asian trading with the unit falling to a low of 1.3145 as traders feared that Irish fiscal problems may balloon out of control.

Japan reported a Current Account deficit today as export demand and higher yen significantly reduced export earnings while global credit crisis lowered the value on overseas investments. Japan’s Current Account balance fell to deficit of -172.8 Billion yen from a surplus of 125.4 Billion yen a year ago.

Since the beginning of the month, the US dollar has skyrocketed against the Japanese Yen. The strength of the currency pair has baffled nearly all forex traders. For the past 12 months, USD/JPY has traded in lockstep with US equities, but as the Dow Jones Industrial Average hits a 12 year low, USD/JPY has soared to a 3 month high. The correlation that once provided currency traders with a reliable explanation for day to day price action is only adding to the confusion. Risk aversion was the predominant theme in the financial markets this past week and yet USD/JPY, “the” barometer of risk is rising and not falling.

The much anticipated announcements from Washington have triggered a dramatic turn in the currency and equity markets. With investors flocking back into the safety of US dollars and the Dow Jones Industrial Average falling 381 points, it is clear that investors are not satisfied with the Obama Administration’s new programs to unlock the credit the market and rescue the financial sector. If today’s announcements were to be measured by their ability to restore confidence in the financial markets, then the new President has failed miserably. Fortunately we are more optimistic and believe that economic stability will be restored under Obama’s leadership, but patience may be needed.

The US trade deficit narrowed materially in the month of November to the smallest since June 2003. Although the narrower trade deficit is normally something to cheer about, the details of the report indicate that the only reasons why trade improved was because of the fall in oil prices and slower domestic demand.