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The Forex Daily Digest – October 20, 2009

The USD began the week under pressure, falling after the Fed Bank of New York released a statement clarifying some recent activity that market participants interpreted as preparation for removing some liquidity from the financial system and boost interest rates. And according to currency analysts, the USD will extend losses as the global economy’s recovery prompts investors to shift away from U.S. assets. The Dow reached 10,092 and gold finished the day higher to close at $1,058.

The EUR traded near its lowest level against the USD in almost a week on speculation policy makers sounded concern about the European currency’s recent strength. The EUR fell back from a 14-month high before talks between euro-area finance ministers in Luxembourg after U.S. equities dropped, slowing demand for higher-yielding assets. The AUD and the NZD strengthened as a Reserve Bank of Australia official said a move to a “more normal” interest-rate setting was appropriate as the economic outlook improves.

The CAD was slightly higher against the USD, but its gain was held back ahead Bank of Canada interest rate announcement expected in the next session. The Bank of Canada is expected to play it safe when it maps out its policy stance, holding the line on interest rates and tinkering at the margins of its economic forecasts as it waits for solid evidence that the recovery is actually happening. The CAD threatens to stifle recovery, but at the same time the Canadian housing and job markets appear to be reheating faster than anybody had anticipated. Analysts anticipate the bank to repeat its pledge to keep the key overnight rate at 0.25 percent until the end of June 2010, conditional on inflation staying on track to meet its 2 percent target.

The JPY fell against all of its 16 most-traded counterparts on speculation Japanese investors will send money overseas for higher returns and the government won’t support a strong currency. Finance Minister Hirohisa Fujii told reporters that governments are responsible for ensuring the stability of their currencies, which “need to reflect the strength” of economies.

China’s yuan saw a 14- month high on speculation the Chinese economy’s recovery from a slump will encourage policy makers to allow currency appreciation to resume. Government bonds advanced and the exchange rate has been kept at about 6.83 per dollar since July 2008, following a 21 percent gain in the previous three years.

Germany’s government sources said it is not aware of any plans to hold a summit meeting to talk about currencies after a German newspaper reported that high ranking European officials were pushing for a meeting to pressure China to allow the yuan to rise. The reports said that senior European officials, including Eurogroup Chairman Jean-Claude Juncker, ECB President Jean-Claude Trichet and EU Commissioner Joaquin Almunia may travel to China before the end of the year for a discussion on currencies.

On the economic calendar look for Building Permits for September, the Producer Price Index, as well as Housing Starts. Earnings scheduled for release today include The Coca-Cola Company, Yahoo, UAL Corp, DuPont, Caterpillar, Regions Financial, Pfizer, Seagate Technology, Quest Diagnostics, State Street Corp, and Comerica Inc.

Happy Trading,

James Dicks

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