The Forex Daily Digest – October 12, 2009

The USD moved higher in Asian trading at the end of the week, after some currency investors took remarks from Federal Reserve Chairman Bernanke as hints that U.S. interest rates could be headed higher. The USD's advance followed remarks from Bernanke, who said the Fed will reverse course and tighten monetary policy "when the economic outlook improves sufficiently." The USD has been hit hard as investors have run toward equities and other riskier investments since the spring after investing in the dollar and other safe havens during the current international financial crisis.

U.S. Treasury debt prices fell on Friday after the Federal Reserve gave reassurances it would not let the current era of easy money get out of hand. Concern over the Fed's zero interest rate policy helped drive the dollar to 14-month lows while a lackluster long-bond auction reminded officials that with a weak currency, foreign enthusiasm for U.S. assets has definite limits.

White House economic adviser Lawrence Summers rejected the idea that the U.S. faces an extended period of below-average growth and high unemployment in the wake of the worst recession since the 1930s. In remarks made in New York, Summers said, “The American people have not become less capable of entrepreneurship. They have not become less dedicated to hard work, and the productive potential of this economy has not declined.”

Meantime, the CEO of the Pacific Investment Management Co., PIMCO, said the U.S. is entering a “new normal” -- a sustained period of annual growth of about 2 percent where credit and jobs are less plentiful. In the five years before the recession began at the end of 2007, gross domestic product expanded at an average annual rate of 2.8 percent.

The CAD declined from the strongest level in more than a year as crude oil, the nation’s biggest export, fell and stocks traveled between gains and losses, dimming the appeal of higher-yielding currencies. Some market analysts believe that there is a good possibility that the loonie will strengthen to parity with the U.S. dollar by the end of the first quarter next year. Canada’s currency last traded at C$1 per U.S. dollar in July 2008.

Canadian companies fired six times more workers than anticipated in September, knocking down the unemployment rate for the first time since July 2008 in another sign the economy is beginning to rebound from the recession. Statistics Canada reported job gains of 30,600 in the month compared with a consensus estimate of a 5,000 increase. The Canadian jobless rate fell to 8.4 percent from 8.7 percent in August.

The GBP fell against the USD on speculation the economy remains extremely weak for the central bank to consider raising interest rates and end asset purchases even as inflation quickens. Sterling also declined against the EUR as a report showed producer prices jumped last month more than economists predicted. Data this week may show U.K. unemployment increasing.

Japan's national strategy minister, Naoto Kan, said on Friday that fund-raising conditions for small companies remains severe but that the Bank of Japan's monetary policy remains independent from the government. Finance Minister Hirohisa Fujii echoed the need to respect the independence of the central bank, saying it was up to the BOJ to decide whether it should phase out its corporate funding support steps. The BOJ is expected to consider ending unconventional emergency steps to help companies as planned in December at a policy meeting which starts tomorrow.

Chinese Vice President Xi Jinping said that China will carry on with its fiscal stimulus and loose monetary policy as the country's economic recovery is not yet on a solid footing. Speaking at a seminar during a visit to Belgium, Xi forecast that a return to growth around the world would be slow and gradual. He vowed to stick to an agreement of overhauling the world's economy reached at a recent summit of the G20 countries.

The U.S. economic calendar is full of major reports this week including Import/Export Prices for September and the Retail Sales report for September. August Business Inventories are also on this week’s calendar along with the minutes from the last FOMC meeting, Initial Jobless Claims, the Consumer Price Index, the Philadelphia Fed Index, Crude Inventories, TIC Data, Capacity Utilization and Industrial Production; plus the October preliminary University of Michigan Consumer Sentiment.

During the first full week of third quarter earnings season, you can expect to hear from Google, Charles Schwab, CSX Corp, Intel, Johnson & Johnson, Nokia, Abbott Labs, JP Morgan Chase, Citigroup, Advanced Micro Devices, Goldman Sachs, IBM, Southwest Airlines, Halliburton and General Electric.

Happy Trading,

James Dicks