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IN BEIJING WE TRUST

By Andrew Wilkinson, Senior Market Analyst, Interactive Brokers

The euro got an earlier reprieve as investor sentiment was bolstered by soothing words from China’s Vice Premier Wang Qishan who paid tribute to European efforts to reverse its sovereign debt crisis. Portuguese sovereign debt, meanwhile, was put on negative watch for a possible downgrade. Stocks around the world continued to rally alongside commodity prices as risk appetite proved the path of least resistance. Subsiding tensions within the Korean peninsula also weighed on the dollar.

Euro – The single European currency remains higher on Tuesday after reaching a three-week low on Monday at $1.3095. Comments made by China’s Vice Premier were taken by investors as supportive of the euro, which rose to $1.3200 in the European session. In October Premier Jiabao said that his nation would not abandon the euro nor sell European bonds. Mr. Qishan stated that he hoped measures put in place in response to the sovereign debt crisis would be fruitful and would quickly steady European economies. The euro was nevertheless dogged after Moody’s Investor Services placed Portugal’s sovereign debt rating on the block for possible downgrade. China is possibly defending its investment in the region and is stating that it has nothing to gain when economic progress is clouded by concerns in the financial markets. The fact that the nation has taken “concrete action” in helping the EU solve its debt problem very likely revolves around the purchase of higher-yielding sovereign debt, although the market is likely to interpret today’s discussion to mean that Beijing is fast-becoming a lender of the last resort. The euro pared its advance although remains higher on the day and last traded at $1.3155.

U.S. Dollar – The dollar index is recovering from an overnight slide to 80.24 following the Chinese words of support for the Eurozone. The index stands at 80.50 ahead of what traders expect to be an upwardly revised showing for third-quarter growth to a 2.8% pace. The lack of retaliation from North Korea after a South Korean military exercise in disputed waters also removed some market fears to restrain the dollar.

Canadian dollar – The Canadian dollar lost the key support of further possible interest rate increases following a sudden drop in the pace of inflation. A report this morning showed that the Bank of Canada’s preferred gauge of inflation, the so-called core CPI dipped to a 1.4% pace in November following an increase of 1.8%. The central bank’s target of 2% is now a distant threat and today’s data argues against pressing on the monetary levers just yet. Some in the markets were disappointed by a standstill in wholesale trade data yesterday and depicted it as a slowing for the economy. The loonie is now set to test Monday’s low at 97.77 U.S. cents.

Aussie dollar – The Aussie rose overnight in response to the stronger tone to risk appetite put into motion by the soothing words from Beijing. Still-rising commodity prices also buoyed the unit, which currently trades at 99.62 U.S. cents although off an earlier 99.76 cent peak. The unit felt some benefit from the first gain in three months for the Conference Board’s leading index for October, which rose 0.6% after a 0.2% dip in the previous month. The Aussie also remains firm against the Japanese unit and buys close to the most in seven months at ¥83.35.

British pound – Weakness in government financials sent the pound scurrying this morning with investors not appreciating the unexpected surge in borrowing for November. A £22.8 billion shortfall in public finances was almost one-third greater than forecast and was high even for this time of year. One year ago the public deficit stood at £16.7 billion. The news caused the pound to lose more than a cent versus the dollar forcing it briefly below Friday’s low at $1.5454. The euro took the opportunity to firm up against the pound to buy 85.10 pence.

Japanese yen – The yen remains firm against the dollar, which fell to ¥83.63 this morning with Tokyo dealers reporting buying from Japanese exporters repatriating year-end funds. The Bank of Japan didn’t budge on interest rates or on its bond-buying program at its final meeting of the year in Tokyo today.