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Remaining choppy

The focus is back on the dollar today as Fed Chair Yellen testifies to the Senate on monetary policy, an event delayed from earlier in the month owing to the weather. This does mean that it’s going to catch more attention that would have otherwise have been the case, given that we have seen a fair amount of data and events since her testimony on 11th February. The dollar remains lower overall from that date, but has managed to recover from the mid-month lows and especially yesterday, with further gains being seen against the euro and sterling in early European trading. This is despite the fact that overall the data (leaving aside new home sales yesterday) has continued to fall to the disappointing side. We are also that much closer to the mid-March FOMC meeting and markets are going to be more sensitive on indications whether the FOMC may pause its tapering policy.

Meanwhile, the other big theme of the week, namely China, has seen some stabilisation. Stocks have recovered with interest rates also falling. The yuan has seen some stability also, with the offshore renminbi, recovering today and increasing the divergence between the on-shore rate, which had narrowed substantially at the end of last week. As we mentioned yesterday, recent events in China, which have seen a substantial weakening and greater volatility in the currency, have added to the uncertainty in markets and made for a more unpredictable end to the month. With month-end falling tomorrow (Friday), markets are likely to remain skittish into the end of the week.

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