Introduction Good evening ladies and gentlemen and welcome to the fourth annual cocktail function of the Financial Markets Department (FMD). It is our privilege to host this event. Thank you for accepting our invitation. You are all familiar with recent economic and financial market developments, but please allow me to just briefly touch on these events from the perspective of the central bank. I will then discuss the Bank’s activities in the financial markets given that, in some form or another you are all counterparties to our operations and activities in the financial markets, or are affected by what we do. International Developments Since the previous FMD Cocktail at the end of July 2009, there have been a number of economic developments, which have had a significant impact on global risk appetite and trends in financial markets. For much of 2009, the EUR was relatively strong, appreciating to USD1,51 in early December 2009. Speculative currency positioning, as represented by weekly data from the Commodity Futures Trading Commission (CFTC), showed aversion towards the USD in this period. The USD showed a net short position of over 280 000 contracts. The VIX index, a popular measure of expected volatility, and often referred to as the “fear index”, hovered around its long-term average of 20 index points, while advanced and emerging market equity markets were recording double digit gains. In developed bond markets, short dated yields were declining owing to the still lax monetary policy, while long-term yields were rising in reaction to increased government debt issuance. Emerging market bond spreads as measured by the Emerging Market Bond Index (EMBI) plus spread, had come off their high levels of almost 900 basis points in October 2008 to 280 basis points in December 2009. Credit Default Swap (CDS) spreads for the advanced economies and for certain European countries recently in the spotlight were also stable over this period, indicating little concern about sovereign default risks. Money markets were also relatively stress-free, as reflected by the continued narrowing in Overnight Index Swap (OIS) spreads at the time. The global economy emerged from recession in the latter half of 2009, much sooner-than-expected and at a pace that was stronger than even the most optimistic forecasts. This development proved to be the catalyst for the rally in financial markets. Furthermore, the pace and speed of the recovery, differed vastly across countries and regions, with emerging markets proving to be the engine for global growth. Together with record-low interest rates in advanced economies, risk aversion having dissipated and abundant liquidity, emerging market countries started to attract significant capital inflows. However, towards the end of 2009, some headwinds emerged, which more recently intensified with the sovereign debt crisis in southern Europe and with markets becoming particularly concerned about a possible default by Greece and the contagion effects thereof. Was this to be the start of a new crisis? Was the nascent global economic recovery now at risk? Was the confidence we saw in financial markets misplaced and needed to be replaced by renewed risk aversion? The initial comfort provided by the EUR750 billion rescue package announced in early May by the European Union (EU), IMF and European Central Bank (ECB), soon gave way to concerns and uncertainty as to whether the measures taken would be sufficient to resolve the underlying solvency problems and whether the required fiscal consolidations would be politically and socially feasible. Budget cuts imposed across the euro zone spurred debate about the sustainability of the euro, the ramifications of fiscal tightening on European economic growth and the impact of a slowdown in the euro zone demand on the overall global recovery. Speculative currency positioning now showed aversion towards the EUR instead of the USD. The net long EUR contracts changed to net short positions of almost 120 000 contracts. Over the same period, the EUR depreciated to USD1,21 in mid-May