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  • The markets are fairly directionless as we start the week
  • Yen weakness remains the major theme
  • Will the French election increase the risk premium to hold French government debt?

It's been a fairly directionless morning and tight ranges seem to prevail. After the data onslaught from last week and the FOMC meeting, this week seems much quieter with little to spur price action. After Friday's rout in the dollar that saw EURUSD jump to 1.3190 and USDJPY to back away from 84.00, the greenback has staged a recovery today with most of the majors stuck in a range as a result.

We noted last week that the dollar rally had not been broad-based and instead had been fairly concentrated against the Aussie and the yen in particular. Yen weakness is the key theme in FX right now, with yen weakness spreading beyond USDJPY. GBPJPY broke above its weekly cloud at 128.45, which now opens the way to 140.

But we could see a slowing in yen weakness after the CFTC reported that yen shorts are at 11-month highs, which explains some of the USDJPY retracement today as investors start to book profits around major levels. For another leg higher to 85.00 and beyond we need to see a move higher in US Treasury yields. Fairly benign US CPI data released on Friday caused 10-year yields to back away from the 2.3% zone. As we pointed out last week 2.4% is a major resistance level we will watch for this week. If yields can't break above here then we may see the USDJPY rally stall.

The only macro data so far has been the Eurozone current account data for January. This is very rarely market moving stuff, and even though the balance swung into deficit at the start of this year, the seasonally adjusted figure was actually in surplus at EUR 4.5bn, up from EUR 3.4bn in December. There was some weak news out of Italy - industrial sales fell 4.9% on the month in January, pushing the annual rate to -4.4%. This does not bode well for Italy as it tries to export its way out of recession, however this hasn't had any impact on Italian bond yields and the 10-year yield and it remains at its lows of the moth around 4.8%.

The Aussie dollar has been fairly mixed day, although it found its feet around 1.0420 last week and has been recovering ever since. Although there is still some expectation of a rate cut next month this has been scaled back in recent weeks as RBA governor Stevens has sounded more hawkish.  He was speaking today and sounded optimistic on the outlook for China, Australia's largest trading partner. He also said that recent ECB actions have eased stresses in the currency bloc. Since the Aussie is highly sensitive to the external risk environment, these are important developments to support the Aussie going forward.

The Eurozone is making headlines again. CDS contracts on Greek debt will be paid out later today. Also Greek elections are creeping up on us. The Pasok socialist party held its leadership election on Friday and finance minister Venizelos won. He will head the party as it goes to the polls; he is expected to resign as finance minister to help with the election efforts.

Talking of elections, the French Presidential election has Hollande and Sarkozy neck and neck right now. Hollande would be a very market unfriendly candidate, but so far his support in the polls hasn't been reflected in the French bond market where 10-year yields are close to 3%. The French hold an auction of nearly EUR 8 billion at 1400 GMT, it is expected to go ahead without a problem, but it will be interesting to see if the election starts to increase the risk premium for French government debt as we get closer to polling day.

Ahead today, the New York Fed's Dudley is speaking at 1740 GMT. He is a noted dove, so his words will be scrutinised by traders looking for the next move in Treasury yields. If he keeps the prospect of more QE from the US central bank alive then we could see Treasuries start to rally (yields fall) and the dollar come under some more selling pressure.

Overall, it's a fairly lacklustre Monday and the markets are taking their time getting into the swing of a new week. US stock markets are poised to open slightly lower after the S&P 500 closed above 1,400 last week.

Best Regards,

Kathleen Brooks| Research Director UK EMEA |

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