The start of the trading week failed to live up to expectations given the event risks building up over the weekend. News flow from the Middle East came in fast and furious as Libya joined the list of countries facing social unrest.

Initial reports estimated around 200 deaths as protests spread across the country. There has even been an unconfirmed rumor that Colonel Gaddafi has fled Libya for South America. CHF continues to be the safe haven trade of choice trading down to 0.9425 and 1.2917 against the USD and EUR respectively. As expected crude prices remain elevated with Brent trading up to $104.40, although premium over WTI has narrowed slightly. Events in Libya and Algeria will continue to be monitored as these two nations are the largest oil producers/exporters in northern Africa. Following the crude trade, precious metals such as gold and silver are making monthly highs on the back of events in the Middle East, as well as concern that US republicans will likely block the president's spending cuts. This afternoon's economic calendar is barren, meaning that headlines from the Middle East will be amplified in importance. With civil unrest continuing robustly in Yemen, Bahrain, Algeria, Iran and Djibouti we should expect risk appetite to remain subdued.

The other major event over the weekend was the G20 communiqué, which underwhelmed expectations for a strongly worded statement. There were clear signs that negotiations were difficult, highlighting that the divergence between nations were high. The old days where the G7 verbally accused the Asian surplus nations of currency manipulation and causing global imbalances are far behind us now. China fully asserted its economic muscle and forced the statement to be vague and basically pointless. Perhaps the one interesting take away was the G20 agreed on a group of economic indicators that could ultimately be used to determine the level of global imbalances. The indicators could include public debt and fiscal & private deficits, domestic savings rate, and the trade balance and investment flows - potentially the first step towards global rules. Nevertheless, it appears China managed to block the inclusion of FX reserves as an indicator to measure global imbalances from the final draft, and erased any mention of real effective exchange rate. In the end, the statement reiterated an obligation to enhance exchange rate flexibility to better reflect underlying economic fundamentals and to steer clear of disorderly movements of FX prices. Really not much there, and FX traders shrugged of the news.

The final event worth noting at the start of this week was the increased hawkish rhetoric coming out of ECB officials recently. On Friday, the ECB's Bini-Smaghi stated as the economy gradually recovers and global inflationary pressures arise, the degree of accommodation of monetary policy has to be monitored and if needed corrected. These comments were repeated last night and follow Trichet's comments that surging commodity and energy prices were being watched carefully and are to be taken seriously. Bini-Smaghi's comments on Friday caused an aggressive EUR spike, yet the reaction to the repeated inflation fighting words was limited. In our minds we are slightly further away from actual tightening than market expectations currently have priced in, however the ECB should lead the G4 in hikes, and strong worded remarks should keep the EUR supported.
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