Consolidative Tone

The major currencies are little changed against the US dollar at the start of the new week.  The exception is sterling, where it has been undermined by weak, but housing data from Rightmove but more importantly by the euro's recovery on the crosses.  The dollar is holding just below the JPY84.40. 

The modest gains in the the euro and Australian dollar have left the hourly momentum indicators over-extended and may struggle to extgend gains in NorthAmerica, which may be devoid of fresh trading incentives. 

Despite a string robust economic data, China did not raise rates, though it looks as if the PBOC extended the "temporary" required reserve increase that was to expire this month into the end of Q1 11. 

Europe's financial crisis has a political dimension, but vulnerability of Italy's Berlusconi has little to do with the economic crisis. In fact, the 2011 deficit is expected to come in between 3.9% of GDP (government estimate) and 4.3% (EC estimate), which is considerably smaller than others on the periphery. Berlusconi's problems are largely home grown.

The debate in parliament today will be followed by a vote of confidence tomorrow. Even if Berlusconi loses the vote of confidence, it does not necessarily mean he will no longer be Prime Minister. Indeed President Napolitano would consult all the political parties, including Berlusconi's, to see if a new government can be formed. Local accounts suggest the odds that Berlucsoni heads a somewhat larger coalition to avoid elections in this challenging financial time may have increased in recent days.

Over the past month, Italy's 10-year premium over Germany has actually narrowed by a few basis points to about 160 bp. However, some pressure is evident in the short-end. The Italian premium in the 2-year sector has increased by about 10 bp over the past month 136 bp. On the whole, domestically-inspired political uncertainty in Italy is unlikely to be a significant market factor.