A Tale of Two Articles - overnight trading took its cue from two news articles. The Financial Times reported that China and the U.S. were closer on trade targets that would address the G20 issue of rebalance world trade by numerical targets for current account balances. The other article from the Wall Street Journal suggests that the Fed would take a gradualist approach to further quantitative easing, making bond purchases of a few hundred billion dollars over several months. These two articles play into would I suggested in my blog a couple weeks ago about a possible deal being worked out between China and the U.S. I suggested that the reason that the U.S. Treasury withheld its report on currency manipulation because they working on a deal on a revaluation of the Yuan and current account surplus in exchange for a much smaller QE 2.0 program. Let's see how this plays out over the next week. On to the market, the two articles caused traders to pare back their bets and cover their USD short positions. Short covering and political upheaval in Greece caused the Euro to fall. Europe's debt woes have returned to the fore after Greek premier George Papandreou threw open the door to fresh elections and vowed to liberate the nation from "slavery and surveillance". In Asia, the Yen fell towards the 82 Yen handle as option-related stops were pulling it lower. The Bank of Japan meets tomorrow and it is not expected to change policy after unexpectedly cutting rates earlier this month. With the limited success of the September 15 intervention, the BOJ needs to do more to curb the Yen’s advance by increasing its purchases of government bonds with longer maturities, according to Merrill Lynch Japan Securities Co. Meanwhile, the air came out of the AUD as the weaker than expect inflation reading pared back expectations of near term interest rate hikes. Swaps prices indicate a 15% chance the Reserve Bank of Australia will increase its 4.50% benchmark rate by a quarter-percentage point when policy makers meet in November. In Canada, the CAD was down as the USD rose broadly on speculation the Fed would take a gradual approach to quantitative easing next week and on remarks that Bank of Canada Governor Mark Carney was concerned over the CAD's elevated level. Carney said that the BOC could conduct transactions in the market for the country’s currency if the exchange rate poses a serious risk to the economy.
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