Morning Currency Wrap for Friday October 22, 2010

Position Squaring ahead of G20 - last night's action was choppy as traders exited their short term trades in order to be neutral ahead of this weekend's G20 finance ministers meeting. Let the politicking begin - U.S. Treasury Secretary Timothy Geithner, in a letter to G-20 finance leaders, said emerging economies with undervalued currencies and solid reserves must allow their currencies to adjust in line with fundamentals. He called on countries to avoid using their currencies to gain an economic advantage, but his proposal to put a numerical cap on current account balances ran into stiff opposition from Japan, Germany and some emerging countries. I have my doubts about whether a new currency deal can be achieved, but you have to remain cautious just in case we get a surprise, hence the position squaring. I suppose that if the U.S. were to agree to a QE lite then maybe the Asian countries would sign up for upward currency revaluation at the same time so that neither would steel market share from each other. No use speculating here, the possibilities are endless. In Europe, the Euro was able to claw back some of its losses after the German Ifo institute's business sentiment index unexpectedly rose in October to 107.6 from 106.8. Meanwhile in Asia, the Yen was slightly down but confined to a tight range as traders remain wary of possible intervention by the Bank of Japan, after Tokyo stepped into the market in September for the first time in six years to rein in the Yen. In Canada, the CAD was firm off its overnight lows after Canadian inflation rose as expected; prompting analysts to predict the Bank of Canada would keep interest rates steady. Canada's annual inflation rate rose to 1.9% in September from 1.7% in August, in line with consensus, in part due to higher prices for energy, autos and electricity. Even though the inflation data is up, I doubt that it is enough to turn the Bank of Canada back to a hawkish stance after this week's comments by the BOC that it would have to consider any further rate hikes carefully, given the patchy global recovery, a weak U.S. outlook and expected curbs on Canadian growth.