Morning Currency Wrap for Tuesday February 1, 2011

Higher Growth & Interest Rate Expectations Everywhere, Except U.S.  - A strong round of economic data from the euro zone and the UK, along with higher interest rate expectations caused market players to abandon safe haven flows due to turmoil in Northern Africa and Egypt. The situation in Egypt has not been resolved as President Mubarak’s refusal to cede control of power illustrates, but for the moment they have not escalated - so traders have trimmed their risk aversion bets. Euro zone factory activity accelerated at its fastest pace in nine months as the  Markit PAM unexpectedly jumped in January. Growth was led by Germany, but the data also showed signs of activity picking up in peripheral nations. More importantly, the PAM surveys also showed rising price pressures, adding to expectations that European Central Bank President Jean-Claude Trichet will keep a hawkish tone on Thursday. In fact, interest rate futures suggest a nearly 80% possibility the ECB will raise rates by 25 basis points in August from the current record low of 1%. Also, German unemployment showed a seasonally adjusted decline of 13,000 in January, which was greater than expected. All of this news has helped the Euro rally o its highest level against the USD in more than two months. In the UK, the GBP rallied to 2-1/2 month high against the USD after U.K. manufacturing PAM jumped to a record 62.0 for January. Also powering the GBP higher was news that the National Institute of Economic and Social Research suggested that the Bank of England will raise its key interest rate three times this year to prevent a surge in consumer prices from getting entrenched in the economy. In Asia, the AUD jumped over parity versus the USD after the Australian central bank ended its monthly policy meeting with a generally upbeat assessment of the domestic and global economy, signaling that higher interest rates could be ahead. So there you have it - a contrast of higher growth and interest rate expectations versus the expectation that the US Fed will leave rates on hold for at least another year and half. In Canada, the CAD slipped back up over parity against a broadly softer USD. Yesterday, the CAD had lost almost a penny after Finance Minister Jim Flaherty's cautious remarks on employment prompted investors to price in a weak January jobs figure on Friday.