The Bank of England arch dove Adam Posen long argued for more QE before it became fashionable again, and he suggested yesterday than the Bank should not stop at buying Gilts in the easing process. Mr Posen thinks corporate debt should be included in the debt the bank buys, as the current mechanism supposed to lower rates on corporate debt is broken because the banks just park newly minted cash on their balance sheet and shun assets perceived as higher risk. The BoE are expected to announce another £50bn of QE at their meeting next week, but it will be gilt only.  It will take time, a considerable change in thinking in the Bank or a serious deterioration in the economic climate in the UK for Mr Posen to get his way.

The expectations this afternoon are for the US economy to add around 150K jobs in January, lower than December but expected by the market because of the effect Christmas has on the job market.   As we mentioned before, the way the US Dollar reacts to positive data is changing from risk-on, risk-off to the complete opposite, where the Dollar rises on positive data. Trying to guess which way the Dollar moves this afternoon is becoming increasingly difficult, which means trading will be choppier than usual in the build-up and immediately after the announcement.

Surprisingly the USD was also down against the safe have Yen and Swiss Franc- this was due to nervousness on the threat of intervention by the Bank of Japan and the Swiss National Bank. The current USD/JPY levels are very close to previous levels where the BOJ intervened in October. In addition EUR/CHF is dangerously close to the 1.20 peg- currently trading at 1.2045- the SNB has said that it will intervene to weaken the Swiss Franc at the 1.20 level. One to watch for the remainder of this week.

Back to the Eurozone and yesterday was a good day for a change with Eurozone country bond auctions successful and in turn yields on Italian and Portuguese debt eased. Feelers were also hitting the markets that the negotiations on the private Greek debt deal were very close to fruition. Today we could see some reversal in the fortunes for the Euro if the promises of resolution on the debt deal do not materialise.

The other major story around at the moment involves the Swiss National Bank’s strong stance of protecting their currency and its 1.20 peg against the Euro. Traders have been testing the 1.20 level and as yet, the SNB hasn’t budged, but expect to see them move if 1.20 is broken as a strong Swiss Franc is really damaging their recovery.

Today is a relatively data light day with the majority of focus surrounding the Greek and Swiss situations. Look for the US Dollar to strengthen on any negative comments from the debt discussion and investors will panic and run back into the safe haven at the first sign of trouble.

Sterling continues to climb against the Dollar driven by the recent surge in the value of the Euro against the Dollar. Apart from PMI figures, there is little by the way of meaningful UK data out this week to move Sterling so expect it to stay in lockstep with the Euro-Dollar. Expectations for the PMI data is expected to show a mixed bag, but given the GDP reading earlier in the week there is more chance of disappointing readings than surprises to the upside and that should translate into Sterling weakness.

US data due today and for the rest of the week include personal consumption expenditure which is expected to show a slight increase and ISM manufacturing on Friday is also expected to show a positive reading. Over recent weeks we have been seeing an about turn in the way the Dollar reacts to positive US data. Over the past few years the risk-on, risk-off theme has been the dominant driver of Dollar movements where good US data was seen as risk-on and the Dollar fell. Recently we are seeing a reversal in the theme, and positive US data is increasingly leading to the US Dollar strengthening.

The UK economy contracted by 0.2% in the previous quarter, which was slightly more than the consensus estimate of -0.1% but not large enough to overly worry the markets given than ONS regularly adjusts initial GBP readings by over 0.1%. In the lead up to the announcement Sterling was sold off across the board quite heavily but once the data was announced we saw a broad recovery in Sterling throughout yesterday. The Bank of England minutes gave no more clues about when further QE might be launched, the Governor did a good job in the proceeding days to forewarn the market that QE is still on the table without specifying exactly when it might start.

Positive German business climate data was the main driver of the currency markets yesterday morning but the rally ran out of steam once the US opened and focus turned to the impending release of the Fed minutes. We do have a large amount of EU data due today, along with the key US durable goods orders later this afternoon.

The Bank of Japan keep their interest rates fixed at 0.1% as the bank noted that the Japanese recovery is moving slower than expected. The strong Yen remains a problem for the economy with corporate revenues likely to be down as a consequence. The ongoing debt problems in the Eurozone remain the biggest risk to the Japanese economy.

Sterling has remained in the middle against its major rivals as the Euro strengthened against both the Dollar and the Pound dragging Cable higher with it. The main news out this week for the UK is the release of 4^th Quarter GDP with a -0.1% figure expected. This significant change in momentum has been priced into the value of the Pound though it will be a massive blow to the global recovery and could be the first of many negative GDP figures from around the World as a second recession starts to bite.

The US 4Q GDP adjustment is also due at the end of this week along with durable goods orders but the overall economic picture, at least at the moment seems much more rosy over in America (this trend will probably begin to decline again triggering QE3). This translates into Dollar strength at least over the coming month versus Sterling and the Euro, which have both staged minor recoveries over the last few days but look likely to come under pressure again if the US data is positive.

The one feature about the Greek saga that has been consistent throughout the last two years has been the painfully slow pace of action, both by the Greeks themselves and by politicians trying to agree exactly how to help them. The theme continues with the proposed bond swap which would see private holders of Greek debt take a 50% haircut on existing holdings and receive a note yielding around the 4% mark going forward. The debate now seems to revolve around whether the Greeks pay 3.5% or 4% on the newly issued note and is holding up a much needed resolution which needs to be agreed before March, when the Greeks effectively run out of Money.

The EUR ability to defend bad news in Europe has been remarkable and its gains have reflected a speculative market that has been extremely short. As we are light on headline data today the markets will have to observe the outcome of the somewhat positive Spanish and French debt auctions while keeping one eye on Greek debt talks with private investors.

But for yet another failure of talks in Greece the EUR should continue on a positive footing. How long this will last is uncertain, particularly given the dangers ahead but at a time when investors have become progressively more bearish on the EUR it may just extend its bounce over the short term. One country to watch is Portugal whose bonds have underperformed recently as markets speculate that it could be the next contender for any debt note.

Back to the UK and Retail sales have come been announced close to median forecasts of +0.6% m/m and +2.6y/y. Sales have improved in December but the improvement is likely to be short-lived, suggesting any support to GBP will be brief. Sterling has underperformed even against the firmer EUR of late but this is supporting better levels for the market to take long positions versus EUR. This explains the move in relative European/US interest rate differentials, which has been linked with the move in EUR/GBP. Overall Sterling could outperform EUR over coming months to around 0.80, with the former continuing to benefit from the simple fact that it is not in the Eurozone and has therefore acquired a quasi safe haven status. Nonetheless, as reflected in the drop in Nationwide consumer confidence in December, this year will be particularly difficult for the UK economy. GBP will be restrained by the prospects of more quantitative easing by the Bank of England as inflation eases further.

This new 15€ billion package involves a range of cuts and tax increases and is likely to prove unpopular, but Prime Minister Mariano Rajoy and his team insist that these severe measures are essential.

Personal and corporate tax returns will be closely scrutinised and tax inspectors will be given the task of visiting workplaces in order to check that all employees are being paid correctly via the payroll. It is also thought that the government will set a limit for payments in cash, thereby restricting the opportunity for money laundering.

Spokeswoman Soraya Saenz de Santamaria estimated that the anti-tax fraud would raise nearly 8.2€ billion of extra revenue in 2012 and added that the three levels of government – central, regional and local – will be expected to eliminate a large number of the approximately 4,000 companies, agencies and other organisations that they own. The previous PSOE has already targeted this financially demanding problem, vowing in 2010 to eliminate 515 but only managed to dissolve 69.

With high unemployment figures and a private sector wallowing in debt, one of the biggest challenges for the new administration is to set a strict limit on its borrowing.

Luis de Guindos, the new Minister of the Economy, stated that banks would be expected to provide 50€ billion to strengthen the country’s balance sheets, severely compromised by the crisis in the housing market. Already banks have been forced to set aside billions to bolster failed mortgages, so this latest plan will prove problematic for some.

In an attempt to restrict the autonomy of Spain’s 17 regional governments the PP has also announced that an act to be passed in March will require all spending plans to be approved by the central government before implementation.

Information courtesy of Perez Legal Group

Sterling has been fairly steady in the early part of the week, but that might change this morning with jobless claims for December due at 9.30. The consensus is for a 7K rise but there is scope for a larger number because of the deteriorating economic picture and so a bigger movement in the pound when the data is released. UK Retail sales are the only release of note for the rest of the week but worth noting because they report over key Christmas period for the retailers and will probably give a good idea to the market if the UK economy is heading for (or is already in) another recession.

The US bank holiday on Monday has meant the USD has also been fairly quiet so far this week, but Thursday and Friday sees a large amount of US data including the CPI figure, which should hopefully give the market an end of week shot of much needed direction in an otherwise rudderless few days