Monday, November 1, 2010

Morning Currency Wrap for Monday November 1, 2010

The Biggest Week of the Year - Tomorrow's U.S. mid term elections is going to give the Republicans control of the House of Representatives and leave the Democrats with a smaller majority in the Senate. The size of the Republican's victory will dictate the next two years of the Presidency. Also this week, the size of the Fed's QE program will determine the reaction in the forex and equity markets. Fed policy makers are expected at the end of their Nov. 2-3 meeting to announce another round of government bond purchases in a strategy called quantitative easing. Estimates for the ultimate size of the Fed’s asset-buying program include $1 trillion by Bank of America-Merrill Lynch and $2 trillion by Goldman Sachs Group Inc. Purchases of $500 billion would add as much stimulus as reducing the Fed’s benchmark rate by 0.50 to 0.75 percentage point, New York Fed President William Dudley said in an Oct. 1 speech. The Bank of Japan moved their policy meeting up a week so that they could  respond to the Fed's actions. Their response will be determined by the action in the USD after the Fed's plans are announced. Also, this week there are three other major policy decisions this week -- in Australia, the euro zone, and the UK. Meanwhile, this morning's manufacturing up tick combined with this week's QE and elections has put the wind firmly behind the sails of the global growth ship. Stronger than expected manufacturing reports in China, Norway, and the UK encouraged demand for higher-yielding assets. Thus, the risk on trade came at the expense of the USD and Yen. Adding to the USD's losses was a report showing that U.S. consumer spending rose less than forecast in September as incomes dropped for the first time in more than a year. In Canada, the CAD edged higher against the USD but remained in a narrow range as range trading is expected to be the order of the day due to event risks this week.  Investors will also be keeping an eye on developments in miner BHP Billiton's push to buy Potash Corp., a fertilizer giant and one of Canada's biggest companies. Ottawa is due to decide by Nov. 3 whether BHP's bid for Potash Corp. will bring a net benefit to Canada, which would allow it to clear the bid or approve it with conditions. The current value of the deal is $39 billion, and it sent the CAD higher when it was first announced in August. If successful, the CAD is likely to get another boost as the Anglo-Australian miner would need the CAD to purchase Potash shares from local investors.

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