The Forex Daily Digest – September 24, 2009

The USD, already hitting its lowest levels of the year, is expected to continue to grow weaker even as an improving U.S. economy leads the Federal Reserve to unwind more of its liquidity-boosting programs. That's because the U.S. currency has increasingly been at the center of a so-called carry trade. The USD fell across the board in Asia, hitting fresh yearly lows against the EUR, the NZD and the AUD ahead of the latest update on monetary policy by the U.S. Federal Reserve. After an unstable start to the day, the USD recovered some lost ground as Asian stocks went into negative territory, but overall, it remained weak.

The USD traded within a penny of a one-year low against the EUR on speculation that the global economic recovery encouraged investors to buy higher-yielding assets before the Federal Reserve’s policy meeting. This was sustained by the widely held view that U.S. rates will remain at ultra-low levels for a sustained period, minimizing the appeal of USD holdings.

Negative news for the USD could hit the street tomorrow and Friday when leaders from the Group of 20 nations meet in Pittsburgh. Any comments on the USD's role as the global currency, the ongoing economic recovery or financial regulation will be watched very closely.

In a statement after the FOMC meeting, Fed officials acknowledged that economic activity has "picked up" with improved conditions in financial markets. The Fed announced that it has extended its purchase of mortgage-backed securities and agency debt into the first quarter of 2010 from December. Analysts expected the move, which smoothes out the purchases. And the Fed kept its target for its fed funds rate set at a range of zero to 0.25%. The Fed repeated that it "continues to anticipate that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period."

Crude oil fell in New York before a report forecast to show that U.S. inventories of heating oil and other distillate fuels rose from their highest in 26 years. The Energy Information Administration reported that crude inventories rose 2.8 million barrels in the week ended September 18th. Gasoline inventories gained 5.4 million barrels, and distillate stockpiles, which include diesel and heating oil, rose 3 million barrels. Futures have increased 60 percent this year on speculation that global fuel consumption may recover as economies start coming out of recession.

The Bank of Canada accepts some short-term exchange rate volatility and is concerned with currency movements only if they persist. Bank of Canada Deputy Governor David Longworth said the country’s currency remains a risk to an economic recovery. The CAD has strengthened 14 percent this year, making the country’s goods less competitive. Canada recorded its first quarterly deficit in traded goods since 1976 between April and June of this year, a gap of C$1.71 billion compared with a C$16.2 billion surplus in the year-earlier period.

Sterling increased and U.K. gilt futures went negative after Bank of England policy meeting minutes reported a consensus to hold steady on its asset-buying plan and apparently there was no discussion to lower the rate on bank reserve deposits. BofE policymakers voted unanimously to keep their asset purchase program at 175 billion pounds in September, and to hold interest rates at 0.5 percent.

In economic news today, the Initial Jobless Claims report will be released at 8:30 am (ET) and Existing Home Sales at 10:00 am. On the earnings calendar look for quarterly numbers from 3Com, McCormick & Co., Finish Line, Christopher & Banks, Saba Software, Steelcase and Vail Resorts and that about finishes up the second quarter earnings season.

Happy trading,

James Dicks