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Yield differential is still in the driver’s seat … as the buck fights the euro and the pound. Traders are now expecting the ECB and BOE will move before the Fed. Minutes from the BOE’s latest policy decision showed three dissenters favoring rate hikes. And though a Reuters survey showed expectations for a rate hike have been pushed back, October 2011 is the new date on the horizon for the ECB. The Fed is still looking at a month somewhere into 2012 it seems.

So though the dollar continues to get damaged, and traders look past geopolitics in the currency markets; though this can change on a dime, as witnessed by the huge volatility in the euro yesterday …

EURUSD Hourly:

… and the weak relative price action in the commodity currencies against the US dollar (next page).

VIX (volatility index) versus USDAUD, i.e. AUDUSD inverted: Notice there has been a fairly close longer term correlation?

Hmmm …

And one more parting thought: If Libya as we know it breaks into civil war and this momentum for change in the Middle East keeps rolling, we would expect oil prices to continue higher. But, instead of looking at this move in oil as inflationary, it must be considered deflationary in the sense that it takes money out of the pockets of consumers that would be spending it otherwise—it becomes a nice big wet blanket to snuff out growth.

Is it possible that both the Bank of England and European Central Bank would latch on to this as a way to avoid what might be very painful rate hikes in the midst of biting austerity? We think so. And if so, the yield dynamics relative to the dollar for euro and pound might shift quickly once again.

Talking our book? To a degree; as we think the scenario is plausible and something to watch for.