The EUR USD rallied on Wednesday after a coordinated interest rate cut by the U.S., Switzerland, Sweden, Canada, the U.K. and the Euro Zone. This move dropped U.S. rates down to 1.5% and took off some of the pressure to buy Dollars as a safe haven investment. Furthermore, the Fed's announcement to sell more than $40 billion in debt to pay for the banking rescue package put further pressure on the Dollar.

Despite the rate cuts, outside markets looked tentative on Wednesday as equity and treasury traders could not make up their minds as to the benefit of the cuts. Both markets traded back and forth most of the day before settling on the downside. Traders seem to be trying to figure out whether the rate cuts are a sign that central banks are going to do all they can to alleviate the credit crisis and to prevent a global recession or a warning of worse days to come.

The main focus by traders is on interest rates. One key indicator is LIBOR. This rate continues to soar even after promises of funds for institutions and the interest rate cuts. LIBOR is an indication of what banks really think of the situation. With LIBOR continuing to rise, it is clear that banks are still asking for higher rates amongst each other. This is a sign of a lack of confidence in the system. Until banks can begin trusting each other, the lending lock-up will continue. Another interest rate indicator traders should focus on is the TED (T-Bills over Eurodollars) spread. At one point on Wednesday the spread widened to 403 before settling at 387. A sign that the credit markets are loosening up will be a tightening of this spread. As long as the banks continue to hoard Dollars to buy U.S. treasuries this spread will remain wide. Traders should monitor this indicator for a sign that the credit markets are getting ready to open up.

One factor that was somewhat overlooked on Wednesday during the announcement of the global interest rate cut was the fact that China also reduced rates for the second time in a month. China was left out of the news release because it was not part of the coordinated effort to lower rates. Nonetheless, China is going to be a major player in this financial crisis before it’s all over. At this time the markets are starving for Dollars, and China holds a lot of them. Estimates are that over $4 trillion is sitting inside foreign central banks with the majority in China. Although it may weaken the Dollar, some of this money is going to have to come back into the market to provide liquidity.

Overall, more credit crisis turmoil is expected to be supportive for the Dollar, but a loosening of LIBOR rates and the flooding of the market with Dollars locked up in central banks could break the Dollar substantially.

The GBP USD tried to rally early in the trading session after the coordinated interest rate cut, but failed to hold on to gains as it became clear that the outside markets were not responding favorably to the cuts. With LIBOR still rising, banks were sending a message that the rate reductions were not going to provide the confidence that the banks need to begin normal lending practices again. Furthermore, the inability to stimulate lending after the Bank of England promised to inject about $87 billion into the banking system if needed is a clear sign that the market is looking for the situation to worsen. Look for the Pound to continue to weaken if the credit markets cannot unlock. Despite the a rate cut by 50 basis points, the Bank of England may slash rates an additional 25 basis points at its meeting on October 9th.

The USD JPY fell sharply lower as global equity markets continued to plummet. Traders continue to unwind carry trades which is helping to accelerate the break to the downside. Until the equity markets can stabilize and rally, look for more downside pressure. Although the Bank of Japan was in no position to cut interest rates because its rates are so low at .50%, the BoJ supported the coordinated rate cut by the U.S. and the four major nations. Look for the USD JPY to follow through on its break as global traders have no interest at this time in holding higher yielding, higher risk investments.

The USD CHF fell on Wednesday in a flight to quality rally. Some traders feel the U.S. economy is vulnerable to a recession which is making the Swiss Franc more attractive. Although the Swiss economy may still be exposed to European financial institutions, the markets seem to be feeling a little more confident that the combination of the interest rate cuts and the promise to back European financial institutions may alleviate some of the strain. Any weakening in Euro Zone banks will bring the buyers back; however, as long as these banks remain stable, the USD CHF should remain under pressure.

The USD CAD rallied on Wednesday as the Canadian economy braces for a possible recession because of lower commodity prices. Although the Bank of Canada participated in the coordinated interest rate cuts, this activity was not enough to loosen up the credit markets. The lack of available credit is putting pressure on the commodity markets because deals cannot be completed. Look for the Canadian Dollar to continue to weaken as weakening commodity prices are likely to push the Canadian economy into a recession. Do not be surprised by another interest rate cut by the Bank of Canada later in the month.

The AUD USD fell to five-year lows as the prices of commodities continued to weaken the Australian economy. The economy is not only down because of lower traditional commodities such as crude oil, grain and gold, but because basic raw materials are also under pressure. In addition to weakening commodity prices driving the market lower, the appetite for risk among global traders is also waning. Carry traders are leaving the Australian markets in droves as they seek safety and security. Although the markets are oversold, continue to trade the trend and look for opportunities to get short.

The NZD USD fell with the Australian Dollar. Besides lower commodity prices, which are a central part of the New Zealand economy driving the NZD USD down, carry traders are also leaving higher yielding assets for the safety of the Dollar. The pressure is now on the Reserve Bank of New Zealand to slash rates. Some traders are calling for as much as 150 basis points. This action is necessary to bring stability to this pair.

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