Morning Currency Wrap for Wednesday April 6, 2011

A Contrast Of Interest Rate Expectations - The Euro surged higher and breached the 1.43 level as the countdown to the first ECB hike since 2008 begins. Adding credence to the hike was strong German manufacturing. Industrial new orders in Germany surprised to the upside, rising 2.4% on the month in February, lifting the annual growth rate to +20,1%. The rise in the Euro came despite rising Portuguese bond yields across all maturities as Portugal raised more than a billion Euros in 6 and 12 month bill auctions. This all come down to a contrast of interest rate expectations - the ECB is hiking, the Fed is approaching neutral, and the Bank of Japan is negative. The only question for the Euro remains is this a one-and-done rate hike or the beginning of a series of rate hikes. In the UK, the GBP came off yesterday's high after weaker-than-expected round of manufacturing output and industrial production data for February, damping speculation that the Bank of England may increase borrowing costs. In Asia, the Bank of Japan begins its 2-day monetary meeting today and it main objective is to boost liquidity measures. It is considering offering a credit program to spur banks to lend to companies with cash-flow shortages in the wake of a magnitude-9 quake and tsunami on March 11, in part to avoid companies from going under. The take away from this is that the BOJ will stick to its ultra-loose monetary stance, which will encourage the Yen carry trade. For evidence just look at the Yen's recent performance, it is threatening to breach key long-term support levels against most currencies, and has already fallen to a 2-1/2 year low against the AUD. Elsewhere, yesterday's Chinese rate hike has already been shrugged off by the market as the reaction to subsequent hikes are less and less when compared to the first one. In Canada, the CAD continues to march higher underpinned by firm oil prices, higher commodity prices, risk on trade, merger and acquisition flows, a leverage play on the US recovery, central bank reserve allocation and expectations that the Bank of Canada will raise interest rates in the months ahead.

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

EUR/USD    1.4302            USD/CHF     0.9177

GBP/USD    1.6299            USD/CAD    0.9587

AUD/USD   1.0416            EUR/CAD     1.3715

NZD/USD    0.7778           GBP/CAD     1.5626       

USD/JPY      85.30             USD/MXN    11.7975