Regional Asian markets sold off today and oil prices moved sharply higher as markets remained focused the situation in the Middle East / North Africa. Risk sentiment dropped overnight as news on MENA tensions including speculation of all out civil war in Libya, growing tensions in Saudi Arabia and reports that Saudi tanks are rolling into Bahrain all carried over into the Asian session reversing the recent rally in stock. The situation remains highly uncertain. EURCHF fell down to 1.2760 while USDJPY moved back to 81.90. Gold traded up to a new record high at $1,434.38 as Brent crude climbed to $116.76. Interestingly, the S&P is now sitting on the 6 month bullish trend support, a break a lower could trigger further downside. With all eyes now focused on events in MENA, yesterday's strong PMI data were ignored. But to briefly recap - the number showed that the global recover was broadly on track. Even the US Federal Reserve Chairman Ben Bernanke told Congress that Tuesday failed to illicit any real market response. He stated that a prolonged rise in oil prices would pose a danger to the economy. But he said a more likely outcome is a temporary and modest increase in consumer prices, not runaway inflation. Bernanke also defended the Fed's $600 billion bond-purchase program which hints that should the economy head south, further easing could be in the cards. He did express confidence that economic growth would increase this year - though worried that it won't be sturdy enough to hastily lower unemployment, now at 9.0%. Today's ADP will provided the entertainment for the day and provides plenty of fodder for analysts to debate Friday's upcoming payrolls figures. The characteristic of the EU crisis is that it will come and go as economic determination continues making debt serving hard and maybe impossible. But there will be periods where it will seem that the EU is in manageable position. That said, S&P stated that its rating on Greece and Portugal would remain on credit watch negative which is a start reminder that the problem hadn't just floated away. For Greece's rating, it would heave heavily on the terms of the new comprehensive European rescue mechanism and further compliance to existing EU/IMF terms. While Portugal is seeing further economic termination and might have to resort to EFSF and IMF funding, the terms would define any rating adjustment. This week's economic data has been broadly supportive with PMIs coming in strong while CPI hit 2.4% (in line with expectations) but well above the ECB upper target band. There is growing expectations that at tomorrow ECB rate announcement Trichet will again sound hawkish which to equate to the EUR firming on interest rate expectations. In New Zealand an unexpected bout of transparency cause the NZD to aggressively sell off. Prime Minister Key stated that he would support a cut in the OCR, and that there is a high probability the nation slips into a recession in the first half of this year. AUDNZD rallied to a 19 year high surging through 1.3650 resistances. On the EM front yesterday Russia widened the RUB trading band from 32.95-36.95 to 32.45-37.45. In addition the central bank sounded very hawkish stating inflation is extremely worrying and that all monetary tools will be use to lower build pressure. Recently there has been more willingness to accept a strong currency since last year's Currency Wars. Many EM have allowed some level of appreciation but nothing in the realm of offsetting the recent surge in commodity prices. As inflation continue to mount especially in the EM Asia it will be very interesting how much flexibility these nations allow their currencies. We still expect that there is excellent opportunity for further appreciation in EMs. That's say we suspect that FX will remain range bound with event s in MENA, impending ECB rate meeting and then Friday US payrolls data keeping directional activity to a minimum.
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