Currently of the 4 major currencies the Yen (JPY) stands above the Pound (GBP), Euro (EUR) and Dollar (USD). As of writing the JPY is strengthening across the board versus the 3 currencies. A strong yen is bad for the global economy. Even at a 0.1% interest rate differential versus 0.5% for GBP, 1% for EUR and < .25% for USD, the yen still manages to advance (WSJ.com). This damages Japan’s export business because the JPY is too strong relative to the other currencies. This also hurts Japan’s economy because they are a pure export economy and their trading partners in the US, GB, and EMU will tend to shy away from Japanese imports due to the currency rate strength. Currency risk is also another factor because one doesn’t know if and when a central bank might intervene in the FX markets to stabilize exchange rates. The SNB does intervention on a regular basis with the Swiss Franc but it still has little effect.

The USD has to advance against the JPY to at least over 100JPY/USD. This should help Japanese exports and US imports. After that the rest of the majors can follow suit with the EUR and GBP.

The global rise in commodity prices show a hint of potential inflation and can alert the central bank heads to decide if a hike is necessary to ward off inflation and potential hyperinflation due to the depressed values of currencies relative to commodity prices in general. At the current market state, I don’t see the Fed or the other central banks hiking rates until possibly Q2 in 2010. Consumer spending will be the determining factor in global demand (fxstreet.com). The market should be sideways to choppy depending on oil demand and inflationary hedges within gold. Soft commodities such as soybeans, rice and corn should also contribute as deciding factors in future rate hikes.

Currently I see the market in a consolidation phase. The G20 meetings this coming weekend should help map out the global economic landscape with decisions on issues regarding the world economy (forexfactory.com).

References:

1. "Currencies." Wall Street Journal. 1 Nov 2009. Wall Street Journal, Web. 1 Nov 2009. <http://online.wsj.com/public/page/news-currency-currencies-trading.html>.

2. "World Interest Rates Table." www.fxstreet.com. 01 Nov 2009. FXStreet, Web. 1 Nov 2009. <http://www.fxstreet.com/fundamental/interest-rates-table/>.

3. Bancomer, BBVA. "US: Recovery will take hold in 3Q09." www.FXStreet.com. 01 Nov 2009. FXStreet, Web. 1 Nov 2009. <http://www.fxstreet.com/fundamental/economic-indicators/gdp-observatory/2009-10-26.html>.

4. "Calendar @ Forexfactory." www.forexfactory.com. 01 Nov 2009. Forex Factory, Web. 1 Nov 2009. <http://www.forexfactory.com/calendar.php>.