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Sterling enjoys a brief rally

This morning, we have already had the UK employment data which was better than expected with a low claimant count reported, the lowest since May 2008. This has allowed Sterling to have a reasonably buoyant trading session so far however the data is far from convincing. In the UK yesterday's inflation number was weaker than expected, coming in at 1.1% y/y the lowest level for 5 years and completely eradicating any ideas of a surge in inflationary pressures for the foreseeable future. These numbers need to be read in conjunction with the contents of the speech given by Charles Bean yesterday within which he began to outline the Bank's current thinking on Quantitative Easing. It is a popular pastime in trading rooms and other financial environments to try and derive an explanation as to how QE works and what the long term effects of differing withdrawal scenarios will be. Mr. Bean's speech was therefore awaited with interest. He talked of various aspects of QE including the effect on the gilts market of a gradual retraction of stimulus and the resultant bottom line effect of the Bank reducing its APF holding by selling into what will become a falling market as supply outstrips demand. What he did not elaborate upon was the inflationary effect that QE would have on the UK economy and what the Bank would do to avert this possible problem. Yesterday's numbers put this concern on the back boiler and reinforced the opinion that UK interest rates would remain at their present lowly levels for some time yet - hence the continued decline of Sterling on the international stage. Inflation hawks are however fretful over the near term, afraid that with the economy still looking sluggish, there is a very strong possibility that the BoE will extend the QE measure up to a staggering GBP 200 billion. The aforementioned hawks would be very vocal in their concern and the probable column inches that resulted would be very unlikely to be Sterling positive. The Canadian Finance Minister, Harper followed in the footsteps of his Kiwi counterparty, bemoaning the strength of the Canadian Dollar but ceding any decision on its value to the Bank of Canada. We haven't seen the US/CAD cross below parity for over 1-year, but it does look as though we are heading that way with the level likely to be breached in the next couple of weeks. In the Far East, the Japanese Ministry of Finance member Minezaki talked about forex levels and despite not referring to actual levels, made it very clear that they were watching rates closely and blamed the current surge in the Yen's value on Dollar weakness. He added that the Dollar's recent weakness was likely to persist. The Bank of Japan kept interest rates at 0.1% at their policy meeting this morning. They did however upgrade their economic outlook. Yesterday we also got a raft of comment from ECB board members. Noyer's remarks were probably more market sensitive, concentrating as they did on the future of the Dollar as the global reserve currency. He dismissed the SDR as a viable alternative but, surprise, surprise suggested the EURO as an ‘obvious candidate'. Nowotny talked about Euro membership and the fact that joining the system was not a way to opt out. He reiterated the fact that there were very clear conditions that had to ne met in order to achieve membership. Still on Europe, Moody's reported that in their opinion Spanish banks are failing to recognize the true scale of their losses during the deep slump in Europe's fifth-largest economy -- something that could hamstring the sector's growth for years. They added that Spanish financial institutions weren't setting aside enough capital to cover surging bad loans. The ratings agency said that the banks had set aside less than half the EUR108 billion ($160 billion) in loan losses it estimates they will suffer during the course of the downturn. Finally, from Australasia, we had the Reserve Bank of New Zealand saying that it will remove some of its emergency liquidity facilities provided to domestic markets at the height of the global financial crisis due to a significant improvement in market conditions.

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