Morning Currency Wrap for Monday February 7, 2011

USD Neutral After A Sharp Rise In US Interest Rates - That's right folks the market sets interest rates not the central banks. Central bank policy meetings are a side show filled with propaganda in order to give the illusion that they in control of the markets. Well the market has spoken, and the bond vigilantes have sold off long term US debt causing yields to rise because they see inflation on the horizon. Of course, nothing I read today even mentions this, all they talked about is how the USD was up due to the improvement in the US jobs market as evidenced by the fact that the unemployment rate went down to 9% from 9.4%. Bond vigilantes ignored the drop in the unemployment rate, as they should because it reflects the fact that people have given up looking for a job, and focused instead on the fact that average hourly earnings rose 0.4% from 0.1%, the fastest increase since Nov 2008. The combination of rising wages and runway food inflation in the rest of the world demonstrates the unfolding inflationary pressure that Bernanke just doesn't see or more like he doesn't want to admit to. Thus, rising US Treasury yields is putting a firm bid under the USD against the Euro and some of the other majors as sentiment switches from bearish to neutral on the USD - expect a trading range. Also, the Euro was weighed down by a larger-than-expected fall in German factory orders for December and by the lack of a concrete proposal coming out of the weekend's EU summit concerning the sovereign debt issue. Meanwhile, the GBP will probably trade sideways this week ahead of Thursday’s Bank of England meeting. No change is expected but the money market sees a one-in-five chance of a rate hike. In Asia, the Yen fell against the majors as the market expects interest rate rises every where except in Japan. In Canada, the CAD was firm against the USD and is trading in a tight range due to higher commodity prices and some positive economic data from the housing sector. Canadian building permits increased 2.4% to $5.7 billion in December, following two consecutive months of declines.