In the last 24 hrs FX markets have been drifting awkwardly, bombarded by a slew of disconnected news stories, making price action choppy. EURCHF and USDCHF broke higher ahead of tomorrow's CPI data, with markets unwinding the risk premium assigned to the CHF.

The PBoC kicked off the rag-tag day with an oddly timed rate hike. The current tightening cycle which now has seen the 3 moves in 4 months, brings the 1yr deposit and lending rates to 3.00% and 6.06% respectively. Most analysts were expecting further hikes but had anticipated the PBoC would wait until after the Lunar New Year holiday. The surprise move illustrates the central bank's determination in fighting inflation and staving off asset bubbles. It also highlights the growing trend of policy makers to take an adversarial view of market participants, limiting transparency and looking to catch traders off guard. Watching the clear and unrelenting upwards trend in commodity prices, spearheaded by the agro complex, exemplifies the spillover effect imported inflation will have on regional central bank policy in 2011.

In New Zealand, Finance Minister English had some tough words for the Kiwi economy. He stated that H2 recession is possible and that normal drivers of economic recovery are absent. FX traders reacted immediately to the weak growth assessment by selling NZD across the board. NZDUSD fell to 0.7710 while AUDNZD spiked to 1.3150 (as the AUD had already adjusted the PBoC hike). As was the case for the last two days, the Asian session was mired with rumors and speculation that central banks were adjusting their USD positions. We haven't received any official confirmation of movement, however it seems logical that USD recycling is occurring and a core driver to the session's price action.

Yesterday, Dallas Fed President Fisher (2011 voter) came out swinging; once again illustrating his maverick lean and comments about current Fed policy. Fischer stated bluntly that it is hard for me to envision a scenario where I would not use my voting position to formally dissent should the FOMC recommend another tranche of monetary accommodation. He added he would lead the charge to tighten monetary policy at the earliest sign that inflationary pressures are moving beyond the commodity markets and into the general price stream. If that wasn't direct enough, Fisher went on to express thoughts most members have not wanted to publicly articulate, stating that through this action (QE2) we have run the risk of being viewed as an accomplice to Congress fiscal nonfeasance.

US Treasuries have temporarily stabilized with the 10yr hovering around 3.60% (after piecing 3.75%), and as we stated yesterday the USDJPY caught up to the shifting yields, climbing to 82.67. Also in Japanese news, Moodys decided not to take action on Japan's sovereign credit rating, but stated that should the government fiscal reform falter the rating could suffer. At present, affordable debt servicing due to large domestic demand keeps it protected.

While the EU sovereign situation has taken a back seat in recent days we are seeing signs that perhaps we are heading back towards areas of concern. First is the gradual widening of peripheral yield spreads, with Spanish debt leading the way higher. Despite the ECB's program of purchasing sovereign bonds in the secondary market, the trend was not reversed, and prices are continuing to slide. There is increasing concern that the comprehensive agreement might be more contentious then originally believed. Stories are circulating that the fiscally sound countries are demanding strict fiscal reforms in exchange for any concessions on the funding side.

Looking forward, we have another European and US session devoid of major scheduled events or economic data. Fed Chairman Bernanke will be today's highlight as he testifies in front of Congress, and of lesser focus the head of the New York Fed Markets Group, Brian Sack, will discuss QE2.
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Today's Key Issues (time in GMT):
08:30 EUR Noyer Speaking
09:30 GBP Visible Trade Balance Last -8.7 BN Exp -8.5 BN
15:00 USD Bernanke Testifies on the US Economy before the House Budget committee
19:00 EUR Bini Smaghi Speaking
23:45 USD Lockhart speaking on the US Economy
23:50 JPY Machine Orders Last -3.0 Exp 9.3