After this week's focus on the U.S., Europe will be next

According to MarkIt, Irish and Portuguese CDS hit an all-time record spread today. This is just a little reminder that while we're all distracted with the US elections and the Fed, the PIG time bomb keeps ticking away. Read the full analysis by John J. Hardy of Saxo Bank here.

Morning Currency Wrap for Tuesday November 2, 2010

Parity Down-Under - The Reserve Bank of Australia again surprised the markets - during its last policy meeting the RBA refrained from raising rates, this time they surprised the markets with a rate hike of 25 basis points to 4.75% as a pre-emptive strike against inflation. The move powered the AUD past parity and to a 28-year high against the USD as interest rate differential between Australia, where rates are rising, and the U.S., where the Fed is widely seen as easing policy further, continue to rise in Australia's favour. Also, the RBA's statement indicated that it wasn't finished raising rates. This should not come as a surprise because Australia was the only western country that did not go into a recession during the credit crises of 2007 to 2009. In Europe, the Euro was up against the USD as today's U.S. midterm elections and tomorrow's Federal Reserve monetary policy announcement are perceived to be USD negative. The Euro was also helped by strong German PMI numbers. Meanwhile in the UK, the GBP was down after a report showed U.K. construction grew at the slowest pace in eight months. In Asia, the Yen was down against the USD as the market remained wary of intervention, especially after Finance Minister Yoshihiko Noda warned once again that the government would take "decisive action" to halt the Yen's rise if needed. In the U.S., all eyes are on today's midterm elections and tomorrow's Federal Reserve monetary policy meeting. The Republicans are expected to take over the House of Representatives but fall short of capturing the Senate. The stronger the Republicans do the more they will be able to curtail President Obama’s agenda. As far as the Fed goes, the market is expected a new round of asset purchases dubbed QE2.0 and the only uncertainty surrounds the scope and pace of the program. In Canada, the CAD hit its highest level against the USD in more than two weeks getting the market excited about parity once again, especially after Australia's unexpected interest rate rise and the movement of the AUD to parity with the USD. However, keep in mind that Australia's RBA is hawkish while the Bank of Canada has be acting more dovish in order to curtail the CAD's strength. Also underpinning the CAD is a possible deal to buy Potash Corp., a fertilizer giant and one of Canada's biggest companies, by Anglo-Australian miner BHP Billiton. If the $39 billion hostile bid goes through, the CAD could go higher as many Canadian shareholders convert their USD payouts back to the domestic currency.

Policy Coordination Could Be On Its Way

The surprise for financial markets could be not what the Fed does but what other central banks do with it as they, like G-20, try to secure a more even global recovery.

QE2 risks currency wars and the end of dollar hegemony

The Fed's "QE2" risks accelerating the demise of the dollar-based currency system, perhaps leading to an unstable tripod with the euro and yuan, or a hybrid gold standard, or a multi-metal "bancor" along lines proposed by John Maynard Keynes in the 1940s.

For the 40-odd countries pegged to the dollar or closely linked by a "dirty float", the Fed's lax policy is causing havoc. Hong Kong's dollar peg, dating back to the 1960s, makes it almost impossible to check a wild credit boom. House prices have risen 50pc since January 2009, despite draconian curbs on mortgages.

As this anti-dollar revolt gathers momentum worldwide, the US risks losing its "exorbitant privilege" of currency hegemony – to use the term of Charles de Gaulle.

Read the complete article from the UK's Telegraph here.

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.