Kathleen Brooks, research director at Forex.com, gives her views on the news and events affecting the currency markets today.

A trio of events have battered risky assets during the European session. Firstly the ongoing people’s uprising in Libya and the escalation of violence and casualties is weighing on the oil price, secondly the New Zealand earthquake; and lastly news that Moody’s had revised lower its outlook on Japanese sovereign debt to negative from stable.

The yen, Swiss franc and dollar have surged this morning while the euro, pound, Aussie, Kiwi and Cad have all been under pressure. Stocks are also lower along with gold and silver while the threat to Libya’s oil supply has caused Brent crude to surge to $106 per barrel. The spread between West Texas Intermediate (WTI) and Brent has narrowed substantially in recent days, last week the spread was knocking on $20, it currently stands just over $12 dollars as investors start to apply some of the risk premium to WTI as they have done to Brent. 5 per cent of Libya’s oil supply goes to the US, so any disruption will put more pressure on the US’s own domestic reserves.

The euro has pared some gains this morning after finding good support at 1.3550. There is a more hawkish tone to the euro in mid-morning during the European session due to two factors: firstly, a short-term Spanish debt auction went well with strong demand for debt issued by Madrid, and secondly, more hawkish rhetoric from European Central Bank members. In recent days [executive board member] Lorenzo Bini Smaghi and [governing council member] Yves Mersch have highlighted the risk from above target inflation. Mersch went as far as to say that the European Central Bank will 'probably make an exit statement at its next meeting,' along with other comments suggesting that the ECB is only a matter of months away from normalising policy. Two-year German government bonds (a proxy for the Eurozone) have spiked and three-month euro swap rates are now back to last week’s levels. The European Central Bank meet next week so we won’t have long to wait to see if president Jean-Claude Trichet steps up his hawkish rhetoric after toning it down at his press conference earlier this month.

Some investment banks are reporting large FX flows today especially into the Swissie and the yen as these currencies continue to act as safe havens. The Kiwi dollar had a sharp sell off after news of the earthquake was released, but since then has found some support at 0.7450, and is retracing some of its earlier losses. Likewise, although the Aussie also sold off sharply, it has maintained parity, which suggests a stronger Aussie relative to the US dollar is here to stay.

In the UK sterling is also re-tracing some of its losses, but remains weak versus the yen and the Swissie. There was some good news regarding the public finances this morning. The public purse registered the largest surplus since 2008 in January as tax receipts exceeded spending. In fact income and capital gains taxes were at their highest level since 2005. While this suggests that the government’s borrowing targets are not exactly ambitious, they do suggest that targets will be met by the end of the fiscal year in April, and may even come in below estimates. This is good news; however, tax receipts are unlikely to come in so thick and fast in future as growth slows as public spending is reigned in.

Overall, the markets remain sensitive to further news out of the Middle East. Ahead today Minneapolis Federal Reserve president Narayana Kocherlakota is talking, he was considered a reluctant supporter of QE2 so it will be interesting to hear any comments he may make regarding the Fed’s plans post-June when the second round of quantitative easing expires, and his views about inflation pressures (core inflation rose to 1 per cent in January from 0.6 per cent in December). Also, the Bank of England’s Adam Posen is talking at 1700 GMT, if he reduces his dovish rhetoric then investors are likely to pounce on that as evidence that a rate hike is near in the UK, which likely send Gilt yields along with the pound higher.