FX markets were nervously quiet in Asian session, just waiting for a directional catalysis. Initially, the deputy governor of the PBoC and the head of the SAFE, Yi Gang, at a press conference in Asia, provided some detailed and honest comments regarding China's foreign exchange and reserve policy. These comments reinforce remarks made on Friday from PBoC Gov. Zhou and Prime Minister Wen. On the subject of FX reserve management, he stated that reserves were appropriately diversified in USD, EUR, JPY and emerging currencies taking in account critical factors, such as foreign investment, external debt and payments and trade. On CNY exchange rate, he reiterated PBoC Gov. Zhou and Prime Minister Wen comments, that a managed float regime was a long term goal and the approach would be steady and cautious. We would like to point out that while there has always been a plethora of sound bites surrounding the CNY, the comments are now coming from people in real positions to make changes. On the question of purchases of US Treasuries, he emphasized that China is a responsible investor and then went on to say that given the size China's foreign reserves, US Treasuries are logically a choice market for China. Perhaps most interestingly was Gang mentioning Gold purchases and the fact that official holdings of gold jumped from 400 tons to 1,054 tons. Yet still accounts for less than 2% of China's foreign reserves. He goes on to say that China will be careful in purchasing gold since any price increase would hurt domestic consumers and that over the last 30 year gold didn't provide a solid rate of return. We would suspect that after the markets have time to digest China's gold remarks we see a market selloff in the precious metal. The comments were mildly supportive of risk correlated trades and support our view that a return to a managed float in the CNY will happened this year. In early European trading the market was hit with comments from Fitch rating agency which shook investor's confidence. First was the news that Fitch maintains a negative outlook on Portugal and might be downgraded should fiscal consolidation be insignificant. Then Fitch stated that UK sovereign credit profile had deteriorated ´Pretty Sharply´. Risk appetite mechanically rushing toward the exits and EURUSD crashed through 1.3600 psychological support. With an empty calendar ahead of us we suspect markets will be stuck in a range bound day.

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