The U.S. Dollar continued its safe haven rally on Wednesday as investors remained more risk averse following the failure of Treasury Secretary Geithner to rally support for the Obama Administration's U.S. banking rescue plan. Traders remained skeptical that the plan in its current state will work and are buying the Dollar as a precaution. The revamped plan will take weeks to reintroduce. This uncertainty is creating risk and the potential for more financial market turmoil as good assets may turn into bad assets in the meantime.
Some of the strength in the Dollar was attributed to speculators taking positions against President Obama's economic stimulus plan reaching him for signature by the February 16 self-imposed deadline.
Selling pressure continued to weigh on the British Pound as the market posted a two-day top at 1.4985. The current chart pattern suggests further weakness until at least 1.4243 to 1.4068.
Overnight Bank of England Governor Mervyn King said the U.K. was in a deep recession and would need to see an increase in the money supply to help stimulate spending. The BoE also forecast a contraction of 4% for this year while looking for inflation to fall to 0.5%. This news led speculators to believe the BoE would begin a campaign to buy assets from financial firms. With interest rates at 1% and with essentially no room for additional rate cuts, the BoE has almost no options left other than to attempt to revive the economy by ratcheting up the money supply.
During his speech BoE Governor King probably accelerated the decline because of his negative tone. Traders feel that he expressed a lack of confidence in the recent BoE's rate cuts and the U.K. government's stimulus plans to revive the economy.
The EUR USD was under selling pressure again on Wednesday as traders continued to seek the safety and security of the U.S. Dollar. The theme of risk aversion is still most prevalent as investors are shunning higher risk assets because of the growing threat of another round of financial turmoil. Traders are still reeling from Treasury Secretary Geithner's inadequate U.S. banking rescue plan. The Euro may continue to feel additional downside pressure as the market anticipates a long waiting period before Geithner presents a more detailed plan. In the meantime there is still exposure to toxic assets poisoning good assets on bank balance sheets.
The Euro may also face additional downside pressure from heavy selling from Russia. Recent attempts to prop up the Russian Ruble have failed while depleting Russian foreign asset reserves by as much as one-third. Russian banks have recently been told to sell Dollars and Euros to help support the Ruble. The possibility of default on loans from Western European banks could also lead to downside pressure on the Euro.
The daily chart indicates the slight chance of a rally in the Euro if the two bottoms at 1.2747 and 1.2706 hold as support. This pair needs a close over 1.3071 to confirm a bottom. Otherwise the Euro faces downside exposure if the two-bottoms fail.
The mixed results in the U.S. equity markets led to choppy, two-sided trading activity in the USD JPY. Global financial uncertainty is leading investors to buy the Japanese Yen as a safe haven currency. Weakness in the equity markets because of the lack of clarity of the U.S. banking rescue plan is leading investors to buy back borrowed Yen.
Gains in the Yen are likely to be limited because of the existing threat of intervention by the Bank of Japan if the Yen gets too strong. Furthermore, the BoJ is likely to try to weaken the Yen by increasing the money supply through a plan to buy bank assets.
Technically, the chart pattern indicates this pair is retracing the recent rally from 87.11 to 92.42. This range sets up a retracement back to a potential support zone at 89.77 to 88.95.
Signs that the global recession is going to deepen are helping to put downside pressure on commodity prices. The weakness in the commodity markets is being led by falling crude oil and energy products. Traders believe that demand will continue to fall until the Obama financial stimulus and banking plans get accepted by the investing public. The break in commodity prices is leading to speculation that Canadian exports will continue to fall. This may lead to more selling pressure in the Canadian Dollar.
News that the Canadian economy was headed toward a deepening recession failed to trigger excessive selling pressure on Wednesday. A report released by the Canadian government showed its first monthly trade deficit in 30 years. Traders may have shrugged off the report because of the outlook for higher commodity prices. Strength in the gold market and the flooding of cash into the global economy may be triggering thoughts of inflation.
The charts indicate that the USD CAD is bound by 1.2024 and 1.2764. This makes 1.2394 an important pivot price.
The Swiss Franc is giving mixed signals. Usually when the U.S. Dollar gets tagged with safe-haven status, the Swiss Franc sells-off. Over the last two days this currency has held steady. News that two of its biggest banks posted major losses has not had a strong negative impact on the market. This may be because investors believe the worst is behind. Continue to monitor this market carefully due to possible intervention by the Swiss National Bank.
The developing chart pattern in the USD CHF indicates tremendous exposure to the downside. The reversal on February 10 at 1.1780 indicates a potential top. A follow through break through 1.1505 could accelerate a break to the downside. The charts indicate that 1.1076 to 1.0909 is the next downside target.
The Australian Dollar found technical support at .6548 to .6477 on Wednesday. In addition to the technical factor, stronger gold prices are leading traders to believe that a hike in commodity markets is imminent. This would be beneficial to the Australian export markets and may revive the economy.
The NZD USD showed some strength on Wednesday mostly on the bullishness in the gold market. Speculators are beginning to believe that higher gold prices are indicative of the possibility of higher inflation in the futures. Higher inflation would help boost commodity prices which would be beneficial to the New Zealand economy.
The chart pattern suggests that there may be one more break to .5202 to .5145. If the market can rally after a successful test of this support zone, then look for the start of a rally.
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