Wednesday, February 23, 2011

Sterling starts near where it left off last week

*USD –* Resurgent political turbulence in the Middle East led to a
prominent risk-off tone in markets today, with the Libyan regime
seemingly on the edge of toppling as violence in the country escaktes.
US stocks fell this morning as the circumstances in Libya prompted
investors to go away from riskier assets, providing a pause after the
market's six-month rally. On the data front the US trading week was
kicked off with conference board consumer confidence for February. The
release came in above expectations at 70.4, building upon last
month's upward revision to 64.8. University of Michigan consumer
confidence is due out on Friday, but no change is expected as rising
gasoline prices continue to dampen consumer sentiment. Additionally,
housing data is out on Thursday, with both new home sales and existing
home sales are expected to fall somewhat after December's massive
gains in both figures. Therefore, moderate declines of 3.3% m/m and
0.3% m/m, in new and existing sales respectively are expected. January
data for durable goods orders will be released on Thursday with
figures expected to regain some of last month's lost impose a curfew
by growing 2.5% as the December decline was largely due to a massive
99.5% drop in non-defense aircraft orders. Finally, we are due to get
quite a few Fed speeches, with a majority of the hawkish leaning
members language throughout the week.

*EUR –* The euro climbed overnight overcoming risk aversion that
gripped the market amid continuing political shakiness in the Middle
East. The euro rose to highs at $1.3703, rebounding from lows at
$1.3524 hit after oil rose above $100 on continuing unrest in Libya.
The euro's nearly 2 cent rise to the upper end of recent ranges came
after ECB policymakers said the central bank is ready to fight
inflation by increasing interest rates when needed. The proclamation
echoed recent comments from other ECB policymakers and highlights
mounting inflation pressures as Europe's economic recovery gains
traction. Euro zone GDP estimates as reported last week grew 0.3% in
Q4 while the region's Purchasing Manager's Index (PMI) at 58.4 in
February showed continuing gains from 57 the previous month. Euro
volatility will likely continue as risk aversion and inflation
concerns pull the currency in opposing directions.

*GBP –* Sterling starts near where it left off last week, largely
relegated to its recent ranges as investors weigh the prospects of
higher British interest rates against continued unrest in the Middle
East. On one hand, investors have flocked to relatively safe
currencies like the USD, CHF and JPY as protests turned deadly in
Libya, but increasing speculation that the BoE will tighten monetary
policy in the near term has provided support for sterling. In a clear
sign that the hawkish faction of the BoE is gaining support,
policymaker, Martin Weale, told reporters on Monday that a "tiny
increase in the rate may prevent a more rapid tightening later."

*JPY –* The JPY pared its recent decline as global financial markets
seek relatively safe investments.
Global risk tolerance has taken a step back over the weekend with
intensifying protests in North Africa and the Middle East spurring
investors to buy safe assets like the yen. A devastating earthquake in
New Zealand further bolstered the JPY and Japanese bonds, despite
warning of further downgrades of Japan's debt rating from
Temperamental's. While the Japanese economy faces significant
difficulties of its own, focus on unrest in the Middle East will keep
the yen well supported back towards the high end of its recent ranges.

*CAD –* The CAD remained within reach of its recent 3-year highs,
but the continued unrest across North Africa and the Middle East has
investors on edge. Crude oil was up nearly nine percent in ahead of
schedule trade on political turmoil and violent protests in Libya, the
first OPEC member to face well loved protests similar to those that
already brought down long-standing regimes in Tunisia and Egypt. While
global markets are wary to assume riskier assets, swiftly appreciating
crude prices will provide sufficient support for the loonie in the
near term.

*MXN –* The Mexican peso closed out last week on a positive note
following the release of improved US housing data and the news of
growing US inflationary pressures. At the start of this week,
geopolitical risks played a role in driving risk aversion flows, with
upheaval in Libya and earthquake in New Zealand pressuring the peso.
Internally, Mexico's bi-weekly CPI for February is expected to post
a 0.20% gain vs. the previous 0.17%. Meanwhile, trade weigh for
January may widen to -295mm vs. the previous -218mm.

*AUD –* The AUD starts the week on the defense, pushed lower by a
recent wave of risk aversion. With global markets already on edge over
continued unrest in the Middle East, a deadly earthquake in nearby New
Zealand encouraged investors to pare back their bets on
higher-yielding, but riskier assets like the AUD. But, the drag from
the New Zealand earthquake will likely be temporary for the AUD, and
soaring commodity prices will provide significant support in the near

*Last Week's Currency Highs and Lows and Forecast*

*U.S. Economic Indicators*


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