What was thought to be the beginning of a correction in the USD yesterday turned out to be just a run of the mill short squeeze. Today's forex driver is policy divergence, which has led to broad selling in the USD once again. Last night's hawkish comments by European Central Bank Governing Council member Axel Weber reaffirmed the ECB's continued commitment to an exit strategy from monetary easing. Weber said yesterday that the risk of recession in Europe is “negligible” and the central bank should stop its bond-purchase program. Weber, who also heads Germany’s Bundesbank, said “these securities purchases should now be phased out permanently.” In contrast, yesterday's release of the FOMC minutes from the September meeting reinforced expectations of more monetary easing in the form of QE. The Euro has been unable to sustain a move above the key psychological $1.40 level, as stops and options barriers at that level were helping to cap gains. However, the Euro was able to make gains against the Yen, CHF, and GBP because it is the only central bank talking about an exit strategy. In Asia, the USD traded in a tight range against the Yen as traders remained nervous that Japanese authorities could intervene the closer it gets to its record low of 79.75 yen. Bank of Japan Governor Masaaki Shirakawa indicated he may examine enhancing a 5 trillion yen ($61 billion) fund to buy government debt. Elsewhere, news out of China shows that it added to its foreign-exchange reserves, the world’s largest, surging to a record $2.65 trillion at the end of September, adding fuel to complaints that the nation’s curbs on gains in the Yuan are undermining the global recovery. However, Chinese officials can also point to improvements in the trade balance. Imports rose to a record value of $128.1 billion, limiting the surplus to the smallest in five months. Also, despite reporting stronger than expected loan growth, China also indicated that it would not raise interest rate for the remainder of the year. This has helped fuel the risk trade today with equities up in almost all countries. In Canada, the CAD is knocking on the parity door as it rose to its highest point against the USD since late April as global equities gained along with commodities, and as new home prices unexpectedly rose 0.1% in August. Finance Minister Jim Flaherty said yesterday Canada will be the first Group of Seven country to balance its budget by 2015.
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