Morning Currency Wrap for Tuesday January 25, 2011

Cable's Unwind Just Starting & Cajas  - Cable, aka GBP, got hammered in European trade after data showed the economy unexpectedly shrank the most in more than a year, damping speculation that interest rates will rise in 2011. GDP fell 0.5% in Q4 after rising 0.7% in Q3, compared with economists' forecasts of a 0.5% gain. Keep in mind that the UK government's austerity measures are being implemented this year, which will surely slow growth even further. The aggressive tightening that started to be priced in early January after the release of the 3.7% CPI reading for December will now start to be unwound. Today's speech by Bank of England Governor Mervyn King will be that much important after this data release. Meanwhile, the Euro pulled back after hitting a two-month high against the USD as the shocking UK GDP report flashed a warning sign of what is to come to the euro zone. I think it is just a matter of time before euro zone interest rate expectations get pulled back, which have been driving the Euro higher this month. Also weighing on the Euro were reports that Spanish government will limit the need to recapitalize the cajas to the tone of 20 billion euros. This statements makes the market nervous because this is exactly what happened in Ireland - recapitalization of Irish bank keep getting changed higher and higher. Don't let the successful bond auction for the European Financial Stability Facility fool you, there is a lack of triple A paper in European bond markets so market players switch from lower grade paper to higher grade. In Asia, the USD was slightly down against the Yen after the Bank of Japan kept its monetary policy unchanged. The AUD continued on its down trend after the release of a lower than expected Australian CPI. In Canada, the CAD fell back towards parity after domestic CPI came in softer than expected, reducing the odds that the central bank will hike rates soon. Consumer prices  rose 2.4% in December from a year earlier after a 2% gain in November, while the core rate, which excludes eight volatile items such as gasoline, quickened to 1.5% from 1.4%. Also weighing on the CAD was a drop in commodities such as crude oil and gold. Crude oil, Canada’s biggest export, fell to the lowest in almost eight weeks after Saudi Arabian Oil Minister Ali al-Naimi signaled that OPEC may bolster production and maintain spare capacity to meet rising fuel demand.