Morning Currency Wrap for Tuesday February 8, 2011

First Of Four Chinese Rate Hikes - The Chinese interest rate hike finally came, it was expected before the start of the lunar holiday in Asia but may have been delayed due to development in Egypt. Chinese Inflation jumped to a 28-month high of 5.1% last November before moderating in December, but it has worried Chinese leaders who fear that a sharp rise in living costs could trigger unrest. The market has taken this in stride probably because it is the first of four that are expected this year - I don't think the risk trade will come off until we see a marked slow down in Chinese growth and production. As always, the first knee jerk reaction to the news was the AUD, which fell on speculation that growth in the world's No. 2 economy may slow. I suspect that the rate hike will weigh more on the AUD than the NZD or CAD due to deteriorating short-term economic data in Australia caused by the floods. Meanwhile, Asian market players, including sovereign names, continued to sell the USD since returning on Monday from the lunar new year holidays. With the risk trade on that means that the market will short the USD and the Yen. Euro sentiment was helped after ECB Governing Council member Yves Mersch argued on Monday that the central bank could raise rates before it ended measures to support liquidity. This statement helped the Euro after last week's comments by ECB President Jean-Claude Trichet doused expectations for an imminent interest rate rise. The rise in the Euro was temporarily capped after the second consecutive disappointing report out of Germany. This time around it was a steeper than expected 1.5% monthly drop in German industrial production in December, which was exacerbated by a 24.1% decline in construction activity amid harsh winter weather. Over in the UK, the GBP was under pressure after the U.K. increased a levy on bank balance sheets. U.K. Chancellor of the Exchequer George Osborne decided to implement the tax sooner than had been expected in order to raise an extra 800 million pounds ($1.3 billion) as he continues to negotiate lending targets and curbs on pay. In Canada, the CAD gave back its overnight gains after the rate hike in China to open little changed from yesterday's close.