Morning Currency Wrap for Friday February 18, 2011

Isn't It Ironic - I could start this commentary just like I did yesterday, in fact I think I will because the safe haven flows are still intact and the only thing that changed was the Euro and a policy change in China. The CHF, Yen, and gold rose across the board amid speculation unrest will keep spreading in North Africa and the Middle East as protests continued in Bahrain, Libya, Yemen and Iran, boosting demand for the safest assets. The Euro spiked lower in early trading but later regained its losses and moved higher after a Bloomberg report quoting European Central Bank official Lorenzo Bini Smaghi saying the central bank may tighten policy as price pressures mount. It sounds to me like Smaghi is auditioning to become the next ECB president by appealing to Germany. The reason the Euro spiked lower was due to fear about a spike higher in emergency overnight borrowing from the ECB. It looks like a European bank was willing to pay high rates in order to get the funding reinforcing worries about financial stress within the euro zone and a bank getting in trouble. Portuguese bond yields continue to hover above the 7% level which was the level that caused Greece and Ireland to seek a bailout. In the UK, the GBP reached a two-week high against the USD after UK retail sales surged last month by almost four times the amount that was expected, suggesting that the Bank of England may have to raise rates. In Asia, the AUD briefly dipped lower after China's central bank raised its bank reserve requirement for the second time this year, following up on an interest rate rise earlier this month as it tries to combat inflation. However, the AUD recoup all of its losses later as the market realized that China effectively took its foot off the accelerator with the hike in bank reserve ratio requirements instead of putting its foot on the brakes, which would be akin to hiking lending and borrowing rates. In Canada, the CAD moved off yesterday's levels after data that showed Canada's annual inflation rate eased, suggesting that the Bank of Canada was under no immediate pressure to hike interest rates sooner than expected. The central bank makes its next announcement on interest rates on March 1. Canada's annual inflation rate slipped to 2.3% in January from 2.4% in December as energy price increases eased. Isn't it ironic that yesterday's inflation rate in the US rose more than was expected but the US Fed has no intention of hiking rates while in Canada the inflation rate eased but the market still expects the BOC to raise rates a couple times this year.