Market Summary The dollar and yen are today’s strongest currencies as unsettled market conditions weigh on emerging and other G10 currencies. Market concern about the potential for further Chinese monetary tightening appears to be one factor behind today’s price action, while the cut in Standard and Poor’s outlook on Japan’s credit rating is also contributing. Still the overall gain in the yen after the credit warning is somewhat unusual – when the U.K. and U.S. came under the fiscal microscope at times during 2009, the pound and U.S. dollar typically came under pressure. The fall in the euro against a backdrop of favorable news today is also noteworthy. Today’s other currency movements are following a classic ‘risk aversion’ pattern, with the emerging market currencies are growth sensitive Australian and New Zealand dollars down more than most. There is still plenty of ‘event risk’ over the rest of this week, even if those events do not actually lead to an increase in risk: the FOMC announcement, the President’s State of the Union address, a possible vote on Fed Chairman Bernanke’s reappointment, and the first release of U.S. Q4 GDP. Regional Highlights Asia/Pacific The yen is stronger, benefiting from unsettled market conditions. Standard and Poors lowered the outlook on Japan’s AA credit rating to ‘negative’ from ‘stable’, and while the direct impact of that warning was negative for the Japanese currency, it was more than offset by the indirect support for the yen from unsettled markets. The Bank of Japan held its overnight rate steady at 0.10%, while Malaysia’s central bank held its benchmark rate at 2.00%, but added that there were risks of keeping interest rates too low for too long. In data release, Japan’s January small business confidence rose to 41.3. South Korea’s Q4 GDP rose 0.2% q/q and 6.0% y/y, a little softer than expected, while Singapore’s December industrial output rose 14.4% y/y, stronger than expected. There was no significant news from China today, but concerns about further tightening measures continue to weigh on regional currencies. The weakest currencies today are the won and Philippines peso, while the Australian and New Zealand dollars registered sizable declines as well. Europe European currencies are lower despite, in the euro’s case, a range of favorable news. Germany’s January IFO index rose more than expected to 95.8, an eighteen month high, French consumer spending rose a firm 2.1% m/m, and the Eurozone November current account showed a small surplus of E0.1B. We also note a successful Greek government debt auction yesterday, selling E8.0B of bonds, albeit at yields that were higher than those on existing debt with similar maturities. The British pound is down more than the euro, a market move that seems more straightforward considering the disappointing 0.1% q/q gain in Q4 GDP. The silver lining, however, is that the U.K. economy showed positive growth for the first time since 2008. The Scandinavian currencies are also under pressure. Among the regional emerging currencies the Polish central bank held its benchmark interest rate at 3.50%. South Africa’s central bank held its benchmark rate at 7.00%, although the bias there appears tilted towards further monetary easing. Americas U.S. Case-Shiller house prices rose 0.2% m/m, a sixth straight increase, while later today January consumer confidence is forecast to rise to 53.5. The data schedule is otherwise quiet, but there are a few media reports that are attracting market attention: some suggestions the Fed could adopt interest paid on reserves as an additional policy rate, and a signal from administration officials that President Obama will announce a freeze on discretionary spending that accounts for 17% of the overall federal budget.

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