The Euro traded sharply higher throughout the night until mid-morning when the European Central Bank re-widened its interest rate corridor. This action effectively cut the return that the ECB pays to banks for holding cash. The purpose of the move was to circulate the Euro. Funds had been building up in the ECB since October when it increased the rate paid on bank deposits.

Although the move is not going to take place until January 21, traders immediately sold the Euro in anticipation of the flood of currency into the market. The announcement of the deposit rate cut from 100 to 50 basis points is designed to revive interbank lending.

Earlier in the week ECB President Trichet hinted that the ECB would use operational weapons to try to stimulate the economy instead of cutting interest rates. The action today is likely one of those weapons. Since this aggressive action is going to take place after the next ECB meeting on January 15, it is probably safe to say that it will not cut interest rates and instead monitor the economy and the banking system to see if this action is working. Nonetheless, traders perceived the move as bearish to the Euro and took profits after a huge rally this week following the lowering of the Fed target rate to .25% to 0%.

The GBP USD traded under pressure most of the day. Following the strong rally on Tuesday, traders feel that the market rallied too much given the strong possibility of further rate cuts down to zero. Although the interest rate differential favors the British Pound, a weakening U.K. economy is steering the Bank of England toward lower interest rates. Support for the rate cuts also came from BoE Governor Mervyn King who hinted that rates would continue to drop. U.K. financial markets are indicating that traders are starting to bet heavily on a decline in the British Pound.

The first sign that today would be a volatile day came early in the night when Japan Finance Minister Nakagawa told reporters that he is "keenly watching" currency markets. He also stressed that he has "the means" to take action against the rise in the Japanese Yen. The USD JPY rallied sharply higher after the news was released. Nakagawa's statements were his strongest since first threatening an intervention several weeks ago. If the BoJ does not intervene then it may turn to other weapons to beat down the Yen. These actions would include buying commercial paper or drastically increasing the money supply. Traders took the threats seriously and aggressively sold the Yen throughout the day. Some traders feel that Nakagawas statements were made to appease the Japanese government which had been critical of his lack of action to stem the appreciation of the Yen. The reversal top made on Thursday could be indicating a major bottom in the USD JPY. A follow-through rally is needed to confirm the bottom.

The USD CAD rallied on Thursday. The market was reacting strongly to the dramatic drop in crude oil prices. Since the Canadian economy relies heavily on crude oil exports, the break under $40 per barrel put fear into bullish traders who had bought Canadian Dollars in hopes that the production cut by OPEC would trigger a rally in crude oil. Instead the opposite is occurring as crude oil prices have plunged since the production cut announcement. Traders now believe that the cut was not enough to support oil prices. Oil prices are basically reflecting the weak global economy. Look for the USD CAD to rally as long as the downside pressure remains on the crude oil market.

The USD CHF rallied sharply higher in a short-covering rally on Thursday. Traders used the actions by the European Central Bank and the Bank of Japan as an excuse to take profits following a sharp rise in the Swiss Franc after the Fed lowered its rate target on Tuesday. Investors have been repatriating their funds as yields fell in the U.S. Technically the USD CHF reached an oversold level and are now likely to retrace as much as 50% of the last break.

The AUD USD posted a closing price reversal top as traders took profits following a strong run-up this week following the Fed rate cut on Tuesday. Weakness in the stock market also encouraged traders to take profits. The Aussie can continue to drop on Friday if demand for risky assets slows down. Although the chart pattern suggests the start of a possible intermediate term rally, traders still remain nervous because of the weakening global economy. This market needs higher stocks and higher commodity prices to continue to support the developing rally.

Long-positioned investors in the NZD USD used outside central bank activity as a reason to take profits after a huge run-up in value this week. Increased trader appetite for risk is still needed to drive this market higher. Lower equity markets and the threat of deflation of commodity prices could turn this market south in a hurry. Give the market 2 to 3 days to retrace the rally. If this market is turning bullish then new buyers should step in following a 50% retracement of the recent rally.

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