Daily Market Fundamental Analysis – Feb. 21st, 2011 |
The currency markets ended the week consolidating. The euro is showing resilience in the face of higher yields on European bonds. Peripheral spreads are mostly wider on the day; with Portugal 10-year yield above 7% for the 11th straight day and so that should help the dollar continue to recoup some of its losses. Sterling is being underpinned by strong UK retail sales data. UK Retail sales came in with an increase of 1.9% compared to the .6% expected by economists.
The direction the BOE might take with regards to policy will become clearer with the release next week of the minutes from the February meeting, with markets looking to see if any other MPC members joined Sentance and Weale in voting to hike rates. Weale’s vote to hike in January was a surprise, and the first time in this policy cycle that another member joined hawk Sentence in voting to tighten. As the UK growth and inflation outlook has shifted, market expectations for BOE tightening have crept up steadily, with 1 year OIS moving from less than 10 basis points in October to a high of 87.5 basis points. The pound is heading for resistance at 1.6270.
The German city-state of Hamburg goes to the polls this weekend. It is the first of seven state elections this year ahead of next year's national campaign. Next year promises to be a momentous year in politics, as the US, Germany, France, China, Russia and Mexico all got to the polls. Elections are also possible in Canada and Japan and they always seem possible in Italy. Merkel's CDU has been the dominant party in Hamburg for the past decade, but polls suggest that it will be pushed out in favor of the center-left Social Democrats. Hamburg traditionally is a strong hold of the Social Democrats.
The Group of 20 leading economies have a good chance of reaching agreement this weekend on a set of guidelines for measuring global imbalances. Chinese negotiators are arguing that they don't have the political mandate to agree to the indicators. The underlying shift would weaken the dollar and increase the Yuan.
Originally posted here.
