Thursday saw another round of U.S. financial market turmoil as problems surrounding Fannie Mae and Freddie Mac continue to dominate the news. These two stocks were down from the opening, dragging the rest of the market with them. Another down day in the stock market caused by the relentless financial crisis quickly spread to the Forex markets as Bernanke and Paulson could not find a time or a place to say anything positive about the situation or the Dollar.

In a statement before Congress, Bernanke just repeated the obvious by stating "financial turmoil is ongoing." Later in the morning Treasury Secretary Paulson testified that "financial markets will take additional time to stabilize." Both comments seem to indicate a financially dangerous situation with no apparent end in sight. The on-going situation looks as if the Dollar is going to be on the defensive for some time.

The good thing is that the Forex markets have been trading orderly. There does not seem to be panic mode trading. The EUR/USD is still range bound with the all-time high at 1.6019 still intact. It is finding resistance from Trichet’s dovish tone regarding the future of interest rates for the rest of the year while finding support from the U.S. financial market uncertainty.

As long as the credit markets keep moving and firms are able to raise capital, traders are not expecting a shutdown in the sector. However, any signs of credit tightening are likely to trigger a bearish response.

Yesterday, Fannie Mae was able to issue two-year notes, which may help to ease some of the tension. This action was not without a cost, however, as the market asked for and received a yield well above the benchmark. This is an indication that the credit markets are working, and that investors want to be paid for their risk under these extraordinary circumstances.

The longer these adverse conditions exist, the closer this market comes to a government bailout of the troubled companies. Continue to monitor this situation, paying particular attention to whether the bigger investment banks are still lending to customers. Any shutdown in the system would be extremely bearish for the Dollar across the board.

The USD/JPY continued to work lower as more weakness developed in the U.S. stock market. Credit problems are the issue as more financial institutions are expected to post additional write-downs. Talk is beginning to circulate that there may be the need for a government bailout of the worst financially strapped institutions. Traders are continuing to seek the safety of the Yen. There may be an acceleration to the downside if the stock market break turns into a free fall. The charts are already indicating that more downside is likely as key support has been violated.

The GBP/USD traded under pressure on Thursday as the Bank of England left interest rates at 5%. Some firms had been calling for a quarter point decrease to stimulate the jobs and housing markets, but the BoE stood firm in holding rates unchanged. Talk is spreading that the U.S. credit market problems will be moving to the U.K. Traders are taking a defensive stance in the Pound. Concerns are also building that the British economy is on the brink of its first recession in several years. This recession coupled with high inflation could prove extremely bearish for the Pound.

The USD/CHF traded mixed on Thursday as the stock market made a slight recovery late in the day. If the financial markets turn weak and trigger a stock market break to new lows for the week, then expect a big break in this pair as traders will flock to the Swiss for quality and safety reasons. Currently, the market is finding resistance a little over 1.03. Breaking major support at 1.0130 could trigger a massive break to 1.0010.

The USD/CAD fell on the weak U.S. stock market and on news that the Canadian Unemployment report is expected to show a net gain of jobs. This news would be a strong sign that the Canadian economy has been successful at decoupling itself from the U.S. economy. An event like this could trigger strong buying in the Canadian Dollar tomorrow. The market tested and found strong buying interest near major support at 1.0071. A trade through 1.0047 could trigger a further decline to .9882.

The AUD/USD found support from a jobs report showing that gains were more than estimated. Traders are especially elated that the jobs market was able to improve despite the Reserve Bank of Australia holding rates at 7.25%. The strong buying in the Aussie prompted talk once again of a move to par by the year’s end. The key breakout price is the 24-year top at .9668. Buy stops and new buying can launch another leg up if this top can be taken out. On the downside, the major support is .9497 to .9457.

Traders bought the NZD/USD as the yield remains relatively high at 8.25%. With traders pretty confident that the U.S. will keep rates unchanged the rest of the year, the interest rate differential between the U.S. and New Zealand proved to be too attractive for investors to ignore. Despite the weakness in the overall economy of New Zealand and talk of a possible recession, investors feel confident that interest rates will remain more stable and higher in New Zealand. It would have to take a surprise announcement at this time by the Reserve Bank of New Zealand to bring sellers back in the market. Technically, this pair is showing signs of strength as important downtrend lines, which have been providing resistance, have been broken.

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