Merkel Backs Bundesbank
In the absence of any major news the dollar held firm overnight. The euro tracked the Eurozone fixed income markets, grinding lower as periphery spreads to Germany widened slightly. The moves were not particularly substantial and largely positioning related but help support our view that the euro should continue to grind lower even in the absence of major risk events from these levels. The EU summit is ongoing and several policymakers have hit the wires. Angela Merkel said that the recent liquidity measures from the ECB must not be repeated, suggesting that she is supporting the view of Bundesbank Chairman Weidmann, who strongly criticised the measures this week. French President Sarkozy was more optimistic however, saying that we’re turning a page on the financial crisis and the strategy is now bearing fruit. Overall there are clear divisions between policymakers still, as evidenced by the failure to release the full bailout amount just yet. Elsewhere, USDJPY continued its advance, touching 81.50 for the second time since the BoJ eased policy two weeks ago. Weak Japanese inflation data for January illustrated the daunting challenge facing the BoJ as it strives to hit the new “goal” of 1%. Governor Shirakawa seemed to be under no illusion about the difficulties that lie ahead, noting again that boosting the supply of funds alone will not immediately lead to price rises. He trotted out his familiar belief that boosting growth is the best way to combat deflation. During the European session, EURUSD traded 1.3240-1.3333 and USDJPY 81.05-81.71.
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