Morning Currency Wrap for Thursday February 10, 2011

Stocks Look Tired, Sovereign Debt Issue Weighs - The USD rose against all of its most-traded counterparts as global stock markets were down; and the US stock market has been rising only on fumes this week as the lack of volume on the way up is a red flag that the stock market is in need of a pause or correction. What will be very interesting is what will market players do in response to the correction. Could they shun stocks and bonds at the same time and go into commodities and precious metals? We are going to find out. Meanwhile, the Euro was down as the market is starting to get nervous about the lack of a concrete plan to tackle the European sovereign debt crisis, especially with the national elections in Ireland coming up. There is a real threat that the Irish people will demand better terms on their bailout or worse, that they will do what Iceland did and just default on all of their debts. It is not lost on the Irish public that Iceland is now flourishing after walking away from their debts. If Ireland were to take this road then there would be a lot of downward pressure on both the Euro and the GBP due to the exposure of European and UK banks - so expect a trading range until the election. Also weighing on the Euro was the fact that 10-year Portuguese bond yields hit an all-time high, widening the spread over its safe-haven German equivalent. The 10-year interest rate on Portuguese bonds hit 7.6%, not far off the level that forced Ireland to agree to a bailout, before falling back to 7.3% amid unconfirmed reports the ECB was buying the bonds to halt the rise. Elsewhere, the GBP slipped after the BOE’s Monetary Policy Committee left its bond program at 200 billion pounds ($321 billion) and kept the benchmark interest rate at a record low 0.5 %. There was a slight chance of an increase in rates but that didn't materialize. In Asia, the AUD was down after a report showed full-time employment dropped in January, fueling speculation the economy is growing too slowly to prompt the central bank to raise interest rates. While overall employment climbed by 24,000 jobs, full-time employment fell by 8,000. In Canada, the CAD was off its worst levels but remained range bound supported on news that Canada’s new home price index rose for a fifth month and U.S. first-time claims for unemployment insurance fell to the lowest level since July 2008.