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Forex Flash: Structural liquidity preference for AAA remains strong – UBS

If we look beyond the short-term, structural liquidity preference for 'super AAAs' remains very strong. As such, “marginal allocations by reserve managers and other funds with 'risk averse' mandates' within this group will rise on a nominal basis. To satisfy such demand, it appears that such countries have actually started to increase their issuance; if anything it helps avoid volatility in their own sovereign bond markets.” suggests Research Analyst Gareth Berry at UBS.

Even excluding Finland's recent addition to the 'super AAA' bloc, some countries in the original group has increased their outstanding debt levels. The dollar's recent decline has also increased aggregate liquidity, especially from the perception of dollar-based sovereign managers. All of these developments will undermine countries whose ratings view is on the slide (US, UK) rather than the opposite.

Ultimately, perhaps one supportive element for gilts and UK assets is that global standards for safety or AAA have fallen quite significantly. Even the Federal Reserve is starting to worry about reducing liquidity in this due to its own large-scale asset purchases, though for now their activities do not appear large enough in scope to matter. Similarly, the BoE will probably need to look at this issue, given their ownership of gilts is even larger. On the other hand, if investors do believe in the central bank put, then it doesn't really matter who is or isn't AAA.

Forex: NZD/USD tests February lows

Demand for the greenback on the risk-off backdrop sent the NZD/USD lower to test the February low at 0.8298. The cross is currently trading around late January lows, of 0.8280/95, as the European morning ends and prepares to pass the torch to the US session.
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Forex Flash: Fed's Bernanke speech about QE as main focus – TD Securities

More important than US housing reports (house prices for December and new home sales for January) and Conference Board’s consumer confidence index for February (“where markets are looking for a bounce from the 14-month low of 58.6 up to 61.2”), TD Securities analysts point to Fed Bernanke’s semi-annual testimony to the Senate Banking Committee at 15:00 GMT as the main focus of the day. “This will be the first update since the Fed adopted open-ended QE, and there is little doubt that Congress will be interested in exactly how and when the Fed will end the program”, wrote analyst Annette Beacher. “Aside from Bernanke’s updated outlook on the economy (probably slightly more upbeat), the market will be looking for any further clarification on when QE will end and what specific triggers the Fed may use to gauge the end of the program”, she added.
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