Morning Currency Wrap for Wednesday January 19, 2011

USD Weakness Means Risk On Trade  - The USD continues to weaken across the board as the shift in interest rate expectations continues to take hold. The realization that the U.S. will maintain ultra low interest rates for  all in 2011and could possibly lower them while the rest of the world is raising or slowly shifting to raising rates to combat inflation is weighing on the USD. Wow, you can really tell that the U.S. is exporting inflation to the rest of the world by way of QE2. This morning's news of U.S. housing starts only reinforces the fact that the U.S. economic recovery will remain sluggish. Housing starts declined 4.3%to a 529,000 annual rate last month. In Europe, the Euro continued to rise on short covering as market players acknowledge that a change in trend as occurred. Reports out of Germany suggest that the German government was considering a Greek debt restructuring plan allowing Greece to buy back its own debt using a euro zone crisis fund.  Of course, both parties deny this. Meanwhile, the GBP continued to add to its nine day winning streak on news that claims for unemployment benefits unexpectedly slipped 4.1K in December amid forecasts for a flat reading. In Asia, there is increased speculation that Asian central banks have been busy diversifying away from the USD and into the Euro. Interest in bonds for Europe's bailout funds, EFSF and EFSM, which are rated triple A has been surprisingly high. Why? Because it is in Asia best interest to have a viable competitor to the USD for diversification reasons. In Canada, the CAD pared some of it overnight gains after domestic manufacturing data came in softer than expected. Canada reported that manufacturing sales declined 0.8% in November to $44.9 billion, led by decreases in the motor vehicle and motor vehicle parts industries. Bank of Canada Governor Mark Carney is likely to attempt to talk down the CAD by suggesting that the strong CAD is curbing exports, which won’t prompt a quick interest-rate increase. The BOC led the G7 by raising interest rates three times last year, starting in June, which caused the CAD to appreciate by  6.4% against the USD, pressuring exporters.