US monetary policy is likely excessively stimulatory for Hong Kong and China and Hong Kong and China are concerned that US monetary policy could fuel asset bubbles.  China is stuck with US monetary policy because of its USD peg, Yellen said. Adjustments to China’s exchange rate policy are all but inevitable, but China is unlikely to adjust exchange rates until mid-2010, she said.

In other words, “get your own damn monetary policy!”

BOC deputy governor Duguay repeats that the BOC will hold rates steady at least until the end of Q2. A strong CAD and lo US demand remain substantial drags on the economy, Duguay said.

St. Louis Fed chief Bullard says the Fed should sell assets before it hikes rates and that he would begin asset sales in the second half of this year. He would want to see the Fed’s balance sheet back to normal size before the business cycle turns again.

Bullard is bullish on the economy, forecasting growth above 3% in the first half of 2010 and little chance of a double-dip recession. A spike in inflation expectations could cause the Fed to tighten even if unemployment stays high, he says.

The Journal reports that the Fed will continue to lay out its eventual exit strategy this week with lots of emphasis on their ability to now pay interest on excess reserves.

• PIMCO’s El-Erian says prefers German government bonds over U.S. treasuries
• Swiss January unadj jobless rate 4.5% vs median forecast 4.6%.  Seasonally adjusted 4.1% vs median forecast 4.3%
• Bk of France January survey sees Q1 GDP at +0.5%.  Industry business sentiment index 104 vs revised 102 in December. Services business sentiment index 89 from 88
• Swiss retail sales 4.75 y/y in December
• Euro zone sentix index -8.2 in February vs -3.7 in January, worse than median forecast-2.3 and lowest read since last October
• China aims to keep inflation at about 3% this year. China may raise rates to fight asset bubble, control inflation – National Pension Chief

Messy Monday morning.

EUR/USD started around 1.3640 and has been up as high as 1.3713, presently at 1.3685.  I’d characterise this morning’s trade as highly nervy.  The picture regarding likes of Greece, Portugal and Spain remains pretty dire, but there is some evident caution at these lower levels. The market probably has one eye on the meeting of EU leaders this coming Thursday and the outside chance they may just pull a rabbit out of the hat.

Russia was a decent buyer, helping give the pairing it’s early upside impetus.

Cable has been all over the shop. Started around 1.5595 and fell sharply early, triggering stops through 1.5550 and reaching session low 1.5536. From  there we saw a murderous short squeeze, the pair rallying quickly to session high 1.5625. 

There was talk of an ACB seller lying in wait up at 1.5630/40, but we never got there.  UK clearer stepped in beforehand selling decent amounts and we’re presently down at 1.5580. 

USD/JPY SIT AT 89.40, unchanged on the day after narrow rangebound trade.

• M2 money supply will grow by about 17-20% this year
• Loans to stay relatively loose despite central bank adjustments
• China likely to gradually increase bank’s reserve requirements further
• May raise interest rates to fight asset bubble, control inflation
• Rate rise less likely in first half of 2010
• Financial risks and asset bubbles are all controllable

We never did get to see whether ACB sell interest in cable up at 1.5630/40 would cap the rally as it topped out at 1.5625. Some stinky rotters popped in and front ran the interest.  Talk has it a UK clearer was prominent among the  stinky rotters. 

We’re presently back down at 1.5580 in what is turning into a particularly nasty, choppy, day.

Meanwhile EUR/GBP remains bid, albeit off earlier session high.  We’re at .8785 having been as high as .8797, aforementioned resistance at .8795/00  having held, so far at least. One wonders for how long?

EUR/USD up at 1.3670. Russia has been notable buyer this morning.

Sell orders now tipped at 1.3680/00. Stops probably parked not far north of there, but no confirmation of specific level/s  as yet.

• Bk of France industry business sentiment index 104 in January vs revised 102 in December
• Services business sentiment index 89 from 88
• Survey sees Q1 GDP at 0.5%
• Bk of France says industrial activity has rebounded across the board, order books improved.

EUR/USD is ticking higher in early European trade, presently at 1.3665.

Define “support”, Mr. Prime Minister. If you mean financially, I suggest you speak with the Germans, the Dutch, etc…

Zapatero also says “we will defend the euro”. This is the same currency the Eurogroup called over valued just last week…

Also on the wires, KS Fed President Hoenig is on the wires saying US growth will be modest but consistent in 2010. A hike in rates depends on the economy. The Fed needs to ensure that the recovery continues but without causing new bubbles down the line.

Not an easy task…

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