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There is of course only one story that is grabbing the headlines in the news, financial or otherwise, and that is the ongoing rescue efforts in Japan. Investors this morning have sold the Nikkei 225 hard with the index falling 6.2% by the close while the JPY has strengthened with traders betting that repatriation flows and construction spending will increase massively in the coming days and weeks. The Bank of Japan has also decided to pump 15 trillion yen ($183bn USD) into the markets to improve financial stability in the short term. This should increase the yields on Japanese debt, attracting investment. A similar policy was put in place after the Kobe earthquake in ’95 and 3 months later USDJPY had lost near 20% to sit at an all-time low. While we are not suggesting that a similar move is likely in the coming 3 months, a strengthening of the yen has to be watched for.

This weakening of the USDJPY cross has caused the US dollar to lose ground overnight with EURUSD back into the 1.39s and GBPUSD flirting with 1.61 after spending most of Friday below 1.38 and 1.60 respectively. The dollar was also hurt by poor consumer confidence on Friday but it is factors outside of the States that are moving the greenback at the moment.

The euro has been the main beneficiary overnight as the meeting of EU finance ministers agreed on an unlikely couple of points designed to shore up the wretched European debt market. They decided to increase the size of the European Financial Stability Fund to EUR440bn and lower the interest rate charges on these loans, although this only applies to Greece so far. GBPEUR is down heavily on this news and is grazing the 1.15 area at the time of writing.

The planned “Day of Rage” in Saudi Arabia was obviously overshadowed by the events in Asia but risk in the MENA region remains. Protests were held in Bahrain, Oman and Saudi over the weekend but the focus of news cameras elsewhere meant that market reaction, so far, has been muted. Oil still remains high however and will continue to do so for a fair while.

A chat about oil naturally leads me into a chat about inflation. UK PPI is still riding high with factory input costs hitting near 2 year highs on Friday, the figure did slightly disappoint the market however and hence sterling’s friday weakness. We are forexasting a strong CPI figure but continued doubts over the inflation outlook may be enough to see some MPC members hold off on interest rate rises.

Latest exchange rates at time of writing