Morning Currency Wrap for Tuesday December 21, 2010

Turnaround Tuesday  - Yesterday's trading was about rating downgrades and rising debt costs but not for long, welcome to Turnaround  Tuesday where the mere mention of China and Europe in the same sentence leads to a softer USD and a ray of hope. The Euro staged a decent recovery after Chinese Vice Premier Wang Qishan said his nation had taken “concrete action” to help the European Union with its debt problems. Why would China do this? For the same reason that Germany will not leave the EU - it's not in their best interest. If Germany were to leave the EU and go back to using the Deutsche Mark then the DEM would soar in value against the Euro, which in turn would kill its economy because the rest of the EU is Germany's biggest export market. So forget about what you read in the newspapers about Germans unwilling to bailout Greeks and paying for the Greeks to retire at the ripe old age of 58, this is about saving jobs for the economy and saving Western European Banks, which are loaded to the gills with debt from Greece, Spain, Portugal, and Italy. Now lets look a China's reason - the EU is China’s largest trade partner and the Asian nation is Europe’s second-biggest export market. If the EU were to break up, the currencies of the weaker countries would devalue, thus making importing from China more expensive. Secondly, with China's foreign-exchange reserves totaling a record $2.65 trillion, they are desperate to keep the Euro as a reliable currency alternative to the USD so that they can further reduce their exposure to the USD. The Euro's recovery rally ran into a little bit of head wind after Moody's announced that it was putting Portugal's A1 rating on review for possible downgrade. In Asia, the Yen climbed to a one-week high versus the USD on speculation Japanese exporters purchased the nation’s currency as the end of the year approaches and on news that tensions appeared to subside on the Korean peninsula after a U.S. negotiator said North Korea agreed to let inspectors visit its uranium enrichment facilities after the communist nation refrained from retaliating after South Korea’s military exercises in disputed waters yesterday. In Canada, the CAD was down for a fourth day in a row after Canada's annual inflation rate slowed more than expected in November, which could keep the Bank of Canada from hiking interest rates for longer than markets anticipate.