Morning Currency Wrap for Monday March 28, 2011

Politics & Propaganda - The Euro came off against the USD after the 2-day EU summit ended without the "grand bargain" that all were expecting and political defeats for the ruling parties of Germany and France. The loss by Chancellor Angela Merkel's conservatives of Baden-Wuertemberg, which they had held for nearly six decades, led markets to believe that Germany will be less inclined to be Euro's ATM machine. It was very clear that the EU summit was not going to have a solution with Finland's opposition party gaining in the polls and threatening not to support any more bailouts ahead of the key April 17 decision. So the EU agreed to defer until June, in hopes that after all the elections are concluded they can then come up with the new grand bargain. Also, weighing on the Euro was talk of ending QE2 early by Fed's James Bullard, which seems a stretch since Bullard is not a voting member. Please enough of this propaganda, a glance at the chart of the USD index showed that it was in danger of falling through a 3-year support line so the Fed trotted out various officials to try and talk up the USD. Look, I will on record by saying that the Fed will not end QE2 - it will probably end in June but they will continue to reinvest the proceeds of their portfolio into Treasurys. In effect I don't expect the Fed's balance sheet to change, which in effect means that QE will continue indefinitely. Meanwhile in Asia, the AUD hit a 29-year high and the NZD was also up on repatriation flows as insurers face massive payouts on the claims from Queensland floods and the earthquake in neighboring New Zealand. The Yen also inched higher toward the 82 level as the fear of more intervention hangs over the market. In Canada, the CAD moved higher after the Bank of Canada warned over the weekend of inflationary concerns, suggesting interest rates may not be on hold much past the May 2nd federal election. Bank of Canada Governor Mark Carney said sustained growth from emerging economies means high commodity prices are expected to stick around for a long time.

Here are the interbank mid-market rates at the time of posting:

EUE/USD    1.4055            USD/CHF     0.9198

GBP/USD    1.5996            USD/CAD    0.9790

AUD/USD   1.0274            EUR/CAD     1.3750

NZD/USD    0.7514           GBP/CAD     1.5644       

USD/JPY      81.78            USD/MXN    11.9935