Correction or just another bounce? The USD extended its move from Friday against the majors, except the Yen, as market players trimmed bearish bets on the USD on uncertainty over how far the Federal Reserve will go in easing monetary policy. With the many false starts that we have had over the last of couple of weeks on the oversold USD, it is difficult to determine if this is a bounce due to profit taking or the beginning of a real correction. If I had to guess I would say it is just a bounce because there has been no fundamental driven change. Perhaps we get some sideways trading until the November U.S. mid-term elections and the FOMC meeting on November 2 and 3, respectively. In Asia, the Yen did move higher against the USD but was confined to a tight range between 81.10 to 81.50. Most market players believe that Japanese authorities will be reluctant to intervene ahead of this week’s meeting of policy makers from Group of 20 nations. Finance ministers and central bankers of the G-20 nations are due to meet on Oct. 22 and 23 in South Korea, which will also host a summit meeting of top G-20 politicians next month. Kyodo News reported yesterday that the nation plans to set up a Cabinet Office study group to examine how to increase the amount of trade settled in yen so as to minimize the impact of currency fluctuations, possibly signaling that Japan would simply accept a strong Yen. In Europe, more is being made of ECB President Jean-Claude Trichet's rebuke of Bundesbank President Axel Weber’s call to end bond purchases. This is not news but is getting profile because Weber is seen as a lead candidate to replace Trichet when his terms expires at the end of Oct 2011. Meanwhile, a voice of reason emerged from Australia. Australian Treasurer Wayne Swan warned against any efforts to artificially lower the value of the AUD against the USD because it could create hyperinflation in Australia. The AUD reached parity with the USD on Friday for the first time since it was floated in 1983. Swan said efforts to depress the value of the AUD would be counterproductive, driving inflation and interest rates higher, while damaging all sectors of the economy. In Canada, the CAD fell more than a cent in overnight trading on the USD's bounce and ahead of tomorrow's Bank of Canada interest rate decision. The market will be looking at the tone of the BOC's statement as the market fully expects the bank to hold its overnight target rate at 1%.
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