Another short squeeze in cable,
EUR/USD rally knocked lower,
BoJ does what was expected of it.

Another sharp squeeze higher was seen in cable this morning, this time on a better than expected UK labour market report. Counter to market expectations jobless claims tumbled by 32.3K; a number made even better by the downwards revision to the January data. It was not all good news with the employment rate in the 3 mth to Jan 2010 falling to its lowest level since 1996 but, against the gloomy consensus relating to growth and a crowded short cable, these data were sufficient to push the pound from the USD1.5220 region all the way up to 1.5373. Underpinning sentiment in sterling were yesterday's opinion polls which hint the UK's Tory party may be clawing back a lead over the incumbent Labour government. From here until the general election (expected early May) sterling will particularly vulnerable to political news suggest scope for further volatility over the coming months. As expected the release of the MPC minutes showing a unanimous vote in favour of steady rates and for no alteration in QE. That said, there was a slightly hawkish element in the meeting with the MPC concluding that further depreciation of sterling was likely to put additional upwards pressure on inflation and that CPI would remain well above target over the next few months. There was no consensus within the MPC on inflation, with not all members seeing a rise in the inflation risks but given the lack of consensus on prices, sterling is likely to be increasingly sensitive to inflation data in the months ahead. On balance, this week's news should be sufficient to cause a significant reduction in short cable positions, though given the uncertainties surrounding UK politics and the budget deficit, the pound is far from out of the woods.

The overnight actions of the BoJ pushed stock markets higher and allowed for some weakness in the JPY. As expected the BoJ announced further policy measures aimed at fighting deflation. The size of December's fixed rate loan facility was doubled to JPY 20 trn; a move not entirely surprising. USD/JPY has been unable to extend its gains in London hours, but solid JPY selling interest has been evidence on dips in both USD/JPY and EUR/JPY.

An early rally in EUR/USD to 1.3814 quickly dissolved this morning. Greece may have pulled itself clear of an imminent crisis but it still faces many tests ahead included the rolling over of around EUR 20 bln worth of debt this spring. Comments from the BBK's Weber that the tools to control fiscal policy within the EMU must be hardened are a reminder of how much more work must be done to avoid another fiscal crisis within EMU in the future. In response to criticism that Germany should take more responsibility for imbalances and should aim to reduce the size of its surpluses, Chancellor Merkel this morning stated that Germany will not give up export strength.

A firm tone in commodities prices has kept the AUD, CAD and the NZD well bid; USD/CAD hitting a session low of 1.1011. Crude oil prices are testing the top of their ranges following the as expected indications from OPEC that output targets will be left unchanged and its forecast for a rise in demand of about 1 mln b/d in the second half of this year.

This afternoon, US PPI data are due.
Jane Foley