• ECB’s Mersch: Excessive low interest rates can distort economy. ECB may reassess view on risks to economic outlook. Would not be surprised if ECB had to adjust language on inflation, conclude that we have upside risks to price stability. ECB will probably make exit statement at next meeting
  • UK January PSNCR -14.360 bln, better than median forecast -6.0 bln, biggest surplus since January 2009. PSNB -5.252 bln, better than median forecast -0.7 bln, biggest surplus since January 2009. Unusually strong annual growth in income tax receipts
  • OPEC Gulf delegate: No oil shortage, but OPEC has clear policy to fill any supply gap
  • Kuwait oil minister: OPEC could call emergency meeting to raise output if supply disrupted
  • Swiss January trade balance +1958 mln, up from +1257 mln in December. Swiss watch exports rose 16.9% in nominal terms
  • Spain PM Zapatero: Confidence returning, does not expect tensions on Spanish debt. Confident Merkel will back stronger euro zone rescue fund next month despite domestic issues
  • Italy February consumer confidence index rises to 106.4 from 105.9 in January

It’s been an extremely hectic morning. EUR/USD sits up at 1.3675 from early 1.3590. Inbetween though we’ve been as low as 1.3525 before a sharp recovery took hold. Day started off with risk aversion very much to the fore (Middle East/North African turmoil, New Zealand earthquake, Iranian naval ships in Suez canal etc) with the dollar, swiss franc and japanese yen beneficiaries in the currency markets.

Asian sovereigns, not unexpectedly, surfaced buying around the lows and we were still getting reports they were buying in the 1.3560/70 area. But it was uptil then a rather laboured revival for the single currency. All that changed when hawkish comments from ECB’s Mersch came out over Bloomberg. We were back over 1.3600 in a flash and we haven’t looked back. There was a slight pause when well-documented sell orders at 1.3650 proved a temporary barrier, but eventually they were taken out.

USD/JPY is slightly lower at 83.10 from early 83.30, but off session low 82.79. The pairing slipped early as increased risk aversion/lower US treasury yields impacted, with hedge funds noted selling EUR/JPY aggressively. The spot pairing has rallied back though as EUR/USD spiked higher and EUR/JPY rallied sharply (probably all those hedge funds turning their short possies)

AUD/USD showing little net change at 1.0030. Asian sovereign buying was noted below 1.0000, lending much-needed support.

Cable slightly lower at 1.6155 from early 1.6170, but has recovered from session low 1.6131. The pairing seems to have been something of a hostage to the machinations of the EUR/GBP cross this morning. The cross is trading up at .8465 from early .8400, recovering strongly from session low .8381 as EUR/USD took flight.