Most investors have their rose tinted glasses on this morning thanks to better than expected economic data from China, Germany and the U.S. The resilience of the EUR/USD and risk appetite in general is remarkable considering that the market's greatest fears of a downgrade of Europe's second largest economy and the European Financial Stability Fund have now been realized. In retrospect perhaps these downgrades may have been discounted by the markets and countries such as Japan have been quick to say that the downgrade will not affect their purchases of EFSF bonds. Damage control is clearly in full swing with France's Finance Minister saying there is no need to act on the EFSF after the downgrade. Even with these reassuring words, it is hard to believe that the EUR/USD can sustain its gains given the severe consequences of recent rating actions. Nonetheless we have to respect the rally even if it is largely caused by short covering. Investors were first relieved to see evidence of a soft landing in China with GDP declining less than expected in the fourth quarter. The relief rally in the EUR/USD and other high yielding currencies gained momentum after Germany reported much stronger than expected investor sentiment numbers. The optimism in the market was further supported by the higher Empire State manufacturing index which rose to 13.48 in January, signaling continued momentum in the sector. We are extremely surprised that investors have completely overlooked the warning by Fitch that Greece will be unable to meet its March bond payment which would effectively put them into default. Discussions with Greek creditors will take place later this month and if additional aid is not disbursed, then a default would be inevitable. Many people will argue that Greece should just default on its loans but one of the main reasons why Europeans across the region want to avoid a default is because the ECB owns EUR45 billion worth of Greek bonds and a default by Greece will make it difficult for them to justify buying other government bonds.
Bank of Canada Keeps Rates Unchanged
Meanwhile the Bank of Canada left interest rates unchanged at 1.00 percent and adjusted their growth forecasts. For 2012, they expect a "more modest recovery" that will boost GDP growth to 2 percent from a prior forecast of 1.9 percent. They also believe that the economy grew by 2.4 percent last year compared to a prior forecast of 2.1 percent. Even though the BoC predicts a stronger growth this year, the tone of the monetary policy statement wasless optimistic than the previous month. The central bank started off by saying that the outlook for the global economy has deteriorated and uncertainty has increased since their last monetary policy report. The sovereign debt crisis in Europe has intensified and measures to pare debt around the world will slow growth in Europe and the recovery in the U.S. For this reason, the central bank remains comfortably on hold for the time being and will monitor developments in Europe and North America before making any new decisions.
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