The Forex Daily Digest – October 27, 2009

The USD hit a 14-month low against the EUR as an advance in Asian stock markets and signs that the global economy is recovering lessened demand for the dollar as a safe haven. The USD fell against 11 of its 16 major counterparts. South Korea’s won strengthened after its economy grew at the fastest pace in seven years. The JPY and EUR gained after an official Chinese paper said the nation should boost reserves in the currencies.

Nobel laureate Paul Krugman said China is devaluing its currency and undermining the global economic recovery by “stealing” jobs that otherwise would have gone to nations that aren’t growing as quickly. He said by pursuing a weak-currency policy, China is siphoning demand away from other nations including poor countries. Krugman wrote that the U.S. economy would benefit if China began selling its “dollar hoard,” which he says is currently worth about $2.1 trillion, because it would make American exports more competitive.

An official at the People's Bank of China downplayed comments that the Chinese central bank should rebalance its reserves away from the USD, after the remarks sent the dollar plunging. The official said that, while the dollar should remain the principal currency in China's $2.27 trillion foreign-exchange reserves, the proportion of euros and Japanese yen should increase. He also said China should reduce pressure from foreign-exchange inflows by gradually improving the yuan exchange-rate mechanism and promoting some capital outflows.

Investors are the most bullish on the yuan in 14 months as China’s exporters say the currency’s link to the falling dollar is helping revive sales. Contracts based on expectations for the currency’s value a year from now show the yuan will appreciate 3 percent, compared with estimates for 0.5 percent two months ago. While Chinese Premier Wen Jiabao said earlier this year that he was “worried” about the weakening dollar eroding the value of his nation’s record $2.3 trillion of foreign-exchange reserves, the falling USD has done little to hurt growth in China.

The AUD experienced some increase, breaking two days of declines, as gains in Asian markets increased demand for higher-yielding assets. New Zealand’s currency fell. The AUD advanced as Toyota Industries Corp.’s unexpected profit boosted earnings prospects for automakers, bolstered stocks in Japan and South Korea.

Bank of Canada Governor Mark Carney delivered a blunt admonishment to the global financial industry, saying it has shown insensitivity over high compensation and called for reforms. Carney said the industry should be in no doubt that capital requirements are increasing and those who pre-fund those requirements -- rather than paying themselves generously - will be in the best possible position over the medium term.

Meantime, the CAD traded near the lowest level in more than two weeks as oil and gold dropped, diminishing the appeal of commodity-linked currencies. The CAD tumbled last week after Bank of Canada Governor Carney stepped up warnings that its increasing strength is a threat to economic recovery.

On the economic calendar today watch for Durable Goods Orders for the month of September, the Case-Shiller Home Price Index, as well as the Consumer Confidence report for October. And after market close, Treasury Secretary Tim Geithner is scheduled to speak.

Some of the major scheduled earnings today include BP Plc, Visa, Honda Motor Corp, Daimler AG, BE Aerospace, E*Trade Financial, Delphi Financial, L-3 Communications, Bayer, DreamWorks Animation SKG, Johnson Controls, TD Ameritrade Holding, and Valero Energy.

Happy Trading,

James Dicks