With the US on holiday, Forex markets were left with little directional assistance and drifted towards USD selling. A story from Spanish newspaper El Pais suggested that Russia, which had suspended Spanish sovereign debt purchases in 2010 due to credit rating downgrades, would revise the policy. The paper quoted Russia's finance minister Kudrin saying Russia has reason to revise its position and illustrated the confidence nations had in Spain after the successful debt issuances (10-year syndicated bond offer was executed with plenty of demand and increased size of €6bn). However, only a few hours later Bloomberg reported that Kudrin had denied the assumption that Russia would revise its policy on purchasing Spanish debt and was not ready to buy Spanish paper with oil wealth fund money. He did say that Russia would be interested in EFSF debt, although still non -committal. The denial failed to dent traders appetite for EURUSD as the pair climb from 1.3260 to 1.3390 in a one directional move.


The EUR also gained support form comments from China that the ratio of USDs in FX reserves needs to be examined; more specifically, that the ratios of EUR and JPY needed to be increased. It seems that despite no solid results from yesterday's 17 finance minister Eurozone meeting, that markets are still optimistic of a positive end result. Yesterday, the market waited anxiously for any headlines from the meeting however all we got were conflicting random comments.

While the Belgian FinMin Reynders stated that he was in favour of doubling the EFSF and discussion on this issue could start immediately, there were strongly worded comments from German and Austrian ministers suggesting that in fact there was no urgency and an increase in the rescue fund was premature. Cleary the solidarity in thoughts around the EFSF that we heard last week from EU officials which gave risk correlated FX trades a strong boost, is less cohesive than believed. We found it interesting that the six AAA rated EU countries had a separate meeting which directly involved expanding the lending capacity, structure of the facility and ways of safeguarding the fund's high rating (according to German newspaper Handelsblatt).

Today UK inflation data will take center-stage in the European session. In a domestic UK newspaper MPC member Paul Fisher stated that the rise in inflation is merely temporary and a policy response would not be appropriate. He stated We have to look through those short-term things, despite whatever unpopularity comes our way. Not really reassuring words considering we have been sitting above the MPC comfort zone for over a year with little sign of relief. And today's number is expected to trend higher to 3.7% y/y (and we expect to peak in feb at 4.1%). We suspect that the market is underestimating the stubbornness of UK inflation and the MPC's commitment to fighting price pressure. Watch for a move higher in the sterling should we print to the upside.

And on a final note we are in agreement with market consensus that the BoC will hold rates at 1.00% this afternoon. Markets will be watching the accompanying statement and any hints about the contents of January's Monetary Policy Report release tomorrow. With 75bp of hikes expected in 2011, watch for signals that downside risks from the US economy have decreased, clearing the way for further tightening and a CAD rally.