Morning Currency Wrap for Tuesday November 16, 2010

Waiting On The Irish - Why is the Irish bailout taking so long? It's the banks. Like I've been saying since late 2007, banks around the world are basically insolvent. Bank balance sheets are loaded with toxic assets that are currently being marked at generous levels not market valve. Banks are continuing to bleed red ink and therefore will continue to need support from governments. Government balance sheets are stretched to begin with so when you add the banking strain you get a sovereign debt crisis. The reason the Irish bailout is taking so long is that the EU and IMF facility is for sovereign governments to tap not for banks - so we wait until the EU and ECB can come up with a program to address the continued problems with their banks. Back to the market, the Euro was up off its lows on a better than expected German ZEW survey, rising to 1.8 from -7.2 in Oct. The Euro was also supported by news that a European official with direct knowledge said Ireland is in discussions with European and International Monetary Fund officials about a bailout that would enable it to inject capital into its banks. Strangely, the Euro also received support from comments by U.S. officials, which pulled the USD off its highs. New York Fed President William Dudley said conditions for an exit from U.S. monetary easing could be "years away", while Fed vice chairwoman Janet Yellen defended the Fed's recently agreed bond purchase plan. In the UK, the GBP firmed and moved higher after U.K. inflation unexpectedly rose helping to delay any expectations of QE2 from the BoE. In Asia, the USD was up against the Yen as the gap between U.S. and Japanese bond yields moved further in the USD's favour. Meanwhile in Australia, the AUD was down even though minutes from the RBA's last meeting were slightly hawkish. The RBA will probably not raise rates for a least a couple of months but the real story in what China is doing about interest rates. Continued fears the China will tighten monetary policy led investors to cut long positions in the AUD. In Canada, the CAD continued its retreat against the USD due to weaker commodity prices as the risk trade comes off. News that Canada’s factory sales fell 0.6% in September after a 2% advance in the prior month will keep the Bank of Canada on the sidelines.