Morning Currency Wrap for Monday March 1, 2011

Possibility For A Big Downdraft In The USD - Better than expected manufacturing PMI throughout the euro zone and upward revisions in euro zone growth forecasts have reinforced the notion that the ECB will raising interest rates well before the US Fed. Some of the PMI hit their highest level since 2000, such as in Germany and Ireland. The fact that Ireland has a strong reading demonstrates that the peripheral European countries are also on track. In the UK, the story was the same, manufacturing PMI came in better than expected at 61.5, the same as in January. This also lays the framework for higher interest rates in the UK with the possibility of an early rate hike. In Sweden, yesterday the SEK was on fire and today is no different as Sweden’s GDP expanded 1.2% in Q4 and annual growth was at 7.3%, the fastest pace in at least 15 years. This also reinforces yesterday's warning from the Riksbank may raise interest rates at every meeting this year. In Asia, the Yen was down slightly even though Japanese payrolls increased by 170,000 in January from a month earlier. Chinese PMI came in a little weaker than expected which clearly shows that the government's measures of increase rates and bank reserve ratios are clearly slowing the economy while combating inflation pressures. In the US, Fed Chairman Ben S. Bernanke is scheduled to deliver a semiannual report on monetary policy today to the Senate Banking Committee and is due to testify to the House Financial Services Committee tomorrow. Bernanke is expected to stay cautious about the economy and relatively relaxed about inflation, thus signalling that it is much too early to think about interest rate hikes. So there you have it folks, the main driver in the forex market over the next few weeks will be divergent interest rate expectations between the Fed and the rest of the world. In Canada, the CAD continued to move higher in overnight trading but fell back this morning after the Bank of Canada kept its main interest rate unchanged at 1% and gave no signal it plans to push it up soon; saying underlying inflationary pressures remain subdued and warned of the negative effects of a rising currency.