An interview with the Financial Times in London with Markets Director at the Bank of England, Paul Fisher has sharply boosted the fortunes of the British pound. The near 2% gains for sterling versus the euro and dollar make for the best daily performance in seven months lifting it to 91.65 pence and $1.6250 respectively. Mr. Fisher stated that the Bank might do well to take a break from further expansion of its asset purchase program. Recent data corroborates the view that the economy is recovering. Central bankers around the world grabbed more column inches to drive today's trading.

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The prospect for less rather than more quantitative easing was just the tonic sterling bulls needed to hear. The notion that authorities need to do more immediately sets off the alarm bells that previously undertaken measures aren't working. Of course that doesn't sit well when surrounding economies are starting to perform well enough on lesser amounts of stimulus and immediately creates pressure on the exchange rate.

But recent British data has been better for choice. The number of workers losing their jobs in September was smaller than expected at 20,800, while the CPI came in at 1.1% year-over-year for the same month. As deputy governor Charlie Bean recently observed in a speech, the authorities will need to remove the excessively stimulative monetary stance at some point should the economy recover. Failure to do so will put the 2% inflation target at jeopardy. While this is numbskull 101 economic material, many investors have overlooked this necessity because the monetary red carpet stretches as far as the eye can see. Ultimately, we will reach the end of it.

Fed chairman, Bernanke boosted the fortunes of the dollar recently by stating the same message, although we doubt his mission was simply that. He understands that a strong dollar is built on sound policy over the long term. For now, investors continue to punish the dollar as equity prices head higher.

ECB governor Trichet called upon the United States today to pursue policies that would strengthen the dollar. He noted that the U.S. authorities understand that a strong dollar is in its interests. Excess volatility is an enemy from the standpoint of stability and prosperity of the global economy, said Mr. Trichet. His comments helped temper the strength of the euro, which earlier rose to $1.4960 and currently buys $1.4895.

Clearly the forex market is in no mood to relent until the euro has seen $1.50 per dollar. Traders earlier ran weak longs out of the market after a strong New York state manufacturing report with the euro declining to $1.4847, and initial claims indicated some ongoing thawing in the labor market.

The Aussie dollar reached a further 15 month high today and currently stands at 91.91. RBA governor Glenn Stevens raised the roof earlier when he stated that the central bank mustn't be too timid about raising interest rates when the time comes. He made reference to the monetary framework and that the role of the RBA must be to coordinate policy in an unbiased manner, which meant taking back what had earlier been given out. It seems there is no cooling off period for interest rate expectations at this point. The yield curve became a little steeper after his comments with the deferred December 2010 contract shedding 23 basis points.

Risk appetite was reined in only marginally earlier this morning. It would be foolhardy to blame earnings at Goldman Sachs for this since those numbers blew expectations out of the water. Rather it was the creeping sense that such strong earnings won't be repeated as markets steady and wide spreads return to normal. In a sense Goldman Sachs has benefited from unusual opportunities during crisis times and its Fort Knox-like balance sheet permits it to rise to those abnormal opportunities along the way.

The Canadian dollar fell of its perch somewhat earlier, not for any fundamental reason other than the price of oil stopped flirting with a price of $76 per barrel. As risk pulls back, expect the commodity dollars to flinch in response. Today the loonie is trading at 97.06.

Andrew Wilkinson

Senior Market Analyst