The Forex Daily Digest – October 14, 2009

The USD fell to a new 14-month low versus major counterparts as investors favored gold, often viewed as the most stable currency, with the dollar's losses softened by a drop in U.S. stocks amid concerns about the strength of the economy's recovery. The dollar cut some earlier losses that pushed the commodity-oriented AUD and CAD to levels not seen since in a year.

The shift out of dollar into euro- denominated assets by central banks around the world will help extend the rally in European corporate bonds. Central banks are ignoring dollars over concern asset values will be battered as the Treasury sells debt to fund its mounting budget deficit. According to the International Monetary Fund, the USD’s share of foreign exchange reserves fell to 62.8 percent at the end of the second quarter, the lowest level since 1999. Almost two-thirds of new foreign-currency holdings were invested into euros and yen in the second quarter.

The CAD traded near the highest level in more than 14 months, approaching parity with the USD for the first time since July 2008 as investors hunted for higher-yielding assets. The CAD gained 2.5 percent against the USD in the past five days. Crude oil, Canada’s biggest export hit a seven-week high and gold hit a record. The Canadian currency last traded at C$1 per U.S. dollar in July of 2008.

The GBP was within a penny of its lowest level in more than six months against the EUR after a business group said the Bank of England should expand asset purchases and inflation slowed more than forecast. Sterling fell to 94 pence per euro for the first time since March before regaining some of its losses. Analysts cut their forecasts for the pound, citing the likelihood purchases will be expanded. The GBP rebounded from the weakest level since May versus the USD.

The Bank of Japan may decide to start withdrawing support from corporate finance markets today despite government misgivings, at a policy meeting that may set the tone for its relationship with the new government. The outcome of the two-day meeting has few implications for the corporate finance market, which has recovered from the shock of the financial crisis triggered by the collapse of Lehman Brothers last year.

The Director of the China Banking Regulatory Commission said that Beijing must be brash and let the yuan increase against the USD if it weakens, even though Chinese exports are already under pressure. He said a stronger exchange rate was needed to prevent a further accumulation of foreign exchange reserves, which have soared in recent years.

The increases in prices of key commodities have brought more attention to the currencies of countries that export them. After Australia's central bank unexpectedly raised its benchmark interest rate recently, more speculation has surrounded what country will be next. Canada, New Zealand and Norway are the most likely candidates. Analysts also noted reports about what central banks are doing with their reserves that indicate a shift away from the U.S. currency, confirming a long-standing fear in the market.

On the economic calendar today expect Import and Export prices for September, the September Retail Sales report, August Business Inventories and the minutes from the last FOMC Meeting. On the earnings calendar look for JP Morgan Chase, Commerce Bancshares, Abbott, Stanley Furniture, Landstar System and WD-40 Company.

Happy Trading,

James Dicks