US OPEN MARKET POINTS 1/26/2006

In Japan tonight, Merchandise Trade Balance slipped by -19% from 2005 but the decline was not due the lack of export growth but rather much higher import costs as energy prices skyrocketed sending imports up by staggering 27.3% from the year earlier. Japanese Corporate Service prices declined -0.4% vs. -0.2% expected contributing to the idea that vestiges of deflation remain within the system. Tomorrow Tokyo and all-Japan CPI data may provide a better read on true status of deflation within the country. Overnight, statement from Japan’s ruling LDP party that BOJ should hold off on any decisions regarding changes in the Zero Interest Rate Policy until August suggests that fiscal authorities will fight tooth and nail any attempt to tighten Japanese monetary policy in the first half of the year. All of these dynamics leads us to conclude that the yen remains vulnerable to the carry especially with US rates expected to widen to at least 450 basis point differential by end of this month.

On the calendar ahead – US Durable Goods expected to rise 0.9% against a drop of -0.6% last month. This number will be quite important to both camps. If the bounce happens as anticipated, the bulls will be able to claim that US growth continues to maintain pace and the Fed may go to 5% money before concluding its tightening cycle.  Should the number miss however, it will be yet another data point in a growing array of evidence that US economy is hitting a wall. While European trading was dull, US session may yet prove to volatile.

FX Spot Overnight
- EUR ranges 2250-70
- JPY bit weaker to 115.80 off trade
- GBP declines to 7835 
- CHF hovers at 2650