This is the biggest increase on this particular measure in 6 months and whilst still within the accepted 2%-3% band, the acceleration will probably cause some concern to the RBA and therefore increase the chances of a 25bps hike tomorrow.

• Sentiment on sterling has done a significant about turn
• In times of risk aversion, EUR will out perform the GBP
• EUR/JPY is approaching major support and the SNB is buying EUR/CHF
• Buy dips towards .8660 with partial s/l below .8625 and balance below .8590. Target .8850

US stockmarkets are threatening to put in a major top and return to their bearish ways and this is the major factor influencing FX markets. Risk aversion is the trade again and if you wish to play the stockmarket on the FX market, then AUD/JPY is probably your best bet. It roared up when stockmarkets found a base last year and if equities really turn now, then the AUD/JPY will probably turn sharply lower as well.

The 200-day MA proved a bridge too far for the AUD/JPY bears and the cross has jumped from 79.15 to 79.70 in a little over 30 minutes. The retail market was not convinced by the move lower in the interbank market, and with interest rates set to rise in Australia again tomorrow, they saw these levels as excellent buying opportunities.

This headline across the Reuters newswires shows the huge problems which the US is faced with.

I remain short this pair and my technical targets are firstly the December low at .8735 and secondly the 200-day MA at .8550. Any rallies back towards the .8900 breakdown point look like selling opportunities. The market is still maintaining it’s losses from earlier this morning, with AUD/USD trading at .8805 and AUD/JPY at 79.15, right on it’s 200-day MA.

The stories Gerry mentioned earlier regarding the FSA and the QE program are weighing heavily on sterling this morning. The real money buyers that the market had been waiting on around the 1.60 level were not big enough to stop the rot and many long positions are bailing out this morning. Levels to watch as the session progesses are: 143.55 in GBP/JPY, last week’s low; and 1.5850 in the cable, where the next batch of corporate/Sovereign interest is expected.

USD/JPY is back below 90 after closing in NY at 90.25 and cable is also slightly weaker in early interbank trade, 1.5960 compared with a close in NY at 1.5980. EUR/JPY is trading around 124.65 with important technical support looming at 124.40. The AUD/USD is also lower as risk aversion gets the week started, .8800, down 50 pips from the NY close.

Good luck today.

China is up in arms (pun intended) over US plans to sell missile-defense and other weapons systems to Taiwan. The sale is interesting on so many levels.

First, to a casual observer of China/Taiwan relations, it appeared from the outside that relations between the two had warmed considerably in recent years. By completing the recently announced US arms sale to Taiwan, Taiwan signals the 60-year stalemate with the PRC remains intact.

From the US perspective, this sale reminds the Chinese that the US has interests, too. The US and others have been railing against Chinese trade with Iran for years, to no avail. Looks like turnabout is fair play.

US/China tensions add to the present risk-averse global markets backdrop, but the dollar could suffer if China begins to specifically link security and financial considerations. That is unlikely at this stage, Id wager.

Bank may echo US warnings over future rise in rates.

I liked the comment at the end of the article, “I think there’s going to be a bit of a bunfight.”

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