Morning Currency Wrap for Wednesday March 23, 2011

Politics, Politics, & A Rumour - The Euro came off against the USD ahead of th3 2-day EU summit that starts tomorrow as politics and a rumour get in the way. First the politics, Portuguese Prime Minister Jose Socrates faces a vote against his deficit-cutting plan today, which is a the heart of its austerity plan. If the vote fails then the Portuguese government will fall and it may need to ask for a bailout during the EU summit. This in itself is not a surprise to the market since Portuguese 10-year bond yields have been over 7% for almost a month, which is the same yield that Greece and Ireland had to throw in the towel. Also weighing on the Euro was a rumour sweeping the trading floors yesterday that Allied Irish  Banks would not pay a coupon later in the week -- something that AIB had to formally deny. This caused 2-year Irish bonds to push past a yield of 10% indicating that Ireland may need more bailout funds. Euro losses should be limited to the 1.40 level as the market is expect an ECB rate hike in the first week of April. In the UK, the GBP was on its back foot, after yesterday's surge, after minutes of the Bank of England last policy meeting didn't reveal any new members sliding into the hawkish camp. The next focus for the GBP will be today's budget by UK finance minister George Osborne, who has billed the 2011/12 budget as one for growth. In Asia, the Yen was virtually unchanged as traders are weary of possible intervention by Japanese authorities. Japan’s government today estimated the damage from the earthquake and tsunami at as much as 25 trillion yen or about USD $309 billion, almost four times the costs imposed by Hurricane Katrina on the US In Canada, politics are in play causing the CAD to come off as the opposition parties in Canada are likely to vote against the budget forcing a spring election. The minority Conservative government promised to cut Canada's deficit by a quarter this year and return to surplus by 2015, but the three opposition parties said they would vote against the budget plan.