Morning Currency Wrap for Monday January 31, 2011

Food Riots & Facebook = A Berlin Moment For The Arab World  - It started in mid December with an altercation between a Tunisian fruit vendor, Mohamed Bouazizi, and a policewoman which led to Bouazizi setting himself on fire in front of a government building. Thanks to facebook and the internet, this lead to protests and riots until the government fell. Then in early January in Algeria, people started rioting over soaring food prices. A few weeks later, the unrest in Egypt can be traced back to food inflation. The surge in global food prices since the summer is not the underlying cause of Arab revolt, it is just the trigger. It is not a coincidence that food prices began to rise when the Chairman of the U.S. Federal Reserve, Ben Bernanke signaled a fresh round of money printing, aka QE2. Now anti-government protests and riots are starting in other neighboring countries, such as Yemen, Jordan, and Saudi Arabia. In fact, Kuwait just granted $3500 and free food for more than a year to each citizen out of fear. The rest of the Asian world is also looking on - Indonesia just ordered 800,000 tones of rice. Meanwhile, the Chinese leadership is watching this in fear - why? Remember what started the Tiananmen Square protests of 1989? You guessed it, food inflation. And Bernanke only wanted a little inflation, be careful what you wish for. Back to the markets, the Euro rose against the USD as a report showed European inflation accelerated at its fastest rate since October 2008, signaling policy makers may be moving closer to raising interest rates. Inflation in the euro region accelerated to a 2.4% annual rate this month from a 2.2% pace in December, and more than the 2.3% that was expected. The data reinforces the difference in policy between the ECB and the Fed. ECB policy makers will discuss the inflation outlook at their meeting Feb. 3. Elsewhere, the USD traded near a four-week low versus the Yen as a measure of inflation watched by the Fed advanced at the slowest pace on record. The Fed’s preferred price index, which is tied to spending patterns and excludes food and fuel, increased 0.7% from December 2009, the smallest increase since records began in 1959. Meanwhile, the safe haven flows into the USD, CHF, Yen , and gold have retraced a little as the markets awaits to see if Egypt’s problems spreads to other neighboring countries. In Canada, the CAD climbed off of its overnight lows and moved higher after data showed that the Canadian economy grew at a faster than expected pace in November. GDP grew 0.4%, better than the 0.3% reading that economists expected.