The strong intraday turnaround in U.S. equity markets on Tuesday eased concerns about the U.S. recession worsening and reduced earlier gains in the U.S. Dollar as trader appetite for risk increased.
The Fed began its two day FOMC meeting on Tuesday. Speculators are looking for the Fed to announce a plan to aggressively buy long-dated debt to help lower long-term interest rates. The Fed's idea is to keep the pressure on mortgage rates which they want to see drop below 5% to stimulate the housing market.
On Tuesday it was announced that U.S. Housing starts rose 22.25% in February. This figure came as a surprise but actually could become meaningless if the U.S. housing market inventory does not start to decline. The U.S. Dollar also got a slight boost from a small increase in the February U.S. PPI figure. The rise in the PPI eased concerns that the U.S. economy would have to deal with deflation along with its other issues.
Look for choppy trading tomorrow as traders await the Fed announcement. Quantitative easing should put pressure on the Dollar, but the size of the move will be dictated by the tone of the Fed's announcement.
The USD JPY rallied again on Tuesday as speculators are trying to get ahead of the Bank of Japan's formal announcement that it is going to buy subordinated loans from banks. Traders are anticipating this action to be bullish for the USD JPY as it will flood the market with Yen. The BoJ is buying the debt to provide capital to banks hurt by bearish stock prices.
The Yen was already weak this morning after the BoJ plan leaked but dropped even further after the release of the surprisingly strong U.S. Housing Starts Report. There is no question that the Bank of Japan and the Japanese government want to see a lower Yen in order to stimulate the Japanese export market. This means that the BoJ may have to get aggressive. Tomorrow it may announce additional quantitative easing plans, but the most aggressive action it can take is an intervention similar to what the Swiss National Bank did last week.
The Euro continued to show strength versus the Dollar as a strong U.S. stock market rally once again triggered greater demand for risky assets. The EUR USD traded firm from the start of the New York session following an overnight report showing an improvement in German Investor Sentiment. This report came as a surprise since the Euro Zone economy is deteriorating rapidly led by high unemployment, declining production and falling exports.
The Euro has traded better all week against the Dollar in a move that was triggered by the G-20 promise to provide aid to ailing emerging markets. The Euro is expected to benefit from this move because it could limit the European Union's exposure to toxic assets in Eastern and Central European banks.
A report Tuesday showing a drop in U.K. housing prices served as a reminder that Britain's recession is far from over and most likely deepening. The GBP USD traded mostly weaker on this news as it indicated that the Bank of England is going to have to continue its aggressive quantitative easing policy. Just last week the BoE initiated its new plan to stimulate the economy by purchasing government debt.
Like the Fed, the BoE is going to have to keep the pressure on mortgage rates in an effort to revive the struggling economy. This means that another round of government gilt purchases will most likely take place sooner rather than later. The BoE would probably rather wait before making its next purchase as flooding the market with Pounds will be inflationary if not handled properly. Look for weakness in the Pound if the Bank of England applies quantitative easing again.
The USD CHF traded higher on Tuesday in its first up day since last week's intervention. It is too early to tell if the intervention has had any impact on the Swiss economy. Traders probably decided to take some money off the table ahead of the FOMC announcement tomorrow.
The best way to approach the Swiss Franc is from the short-side as the Swiss National Bank and the Swiss government is on record as desiring a weaker Swiss Franc. This means be patient and sell rallies because you may get help from the SNB in the form of either quantitative easing or another round of intervention.
The U.S. Dollar gave up early gains versus the Canadian Dollar as a late session rally in U.S. stock markets triggered demand for higher-risk, higher-yielding assets.
The USD CAD started off strong due to the bullish news regarding U.S. Housing Starts and the bearish news about Canadian Labor Productivity and Factory Sales. Traders forgot about the weakening Canadian economy however once the U.S. stock markets and crude oil began to rally.
Technically it looks as if this is a top in the USD CAD following the confirmation of last week's closing price reversal top. There is a lot of selling pressure coming into the USD CAD at or near $1.30. This price apparently is the line in the sand. If this price ever goes bid, look out to the upside. At this time the pattern suggests the start of a 2 to 3 week break.
The AUD USD ignored the somewhat bearish RBA Minutes from the March 3 meeting and posted a strong gain on Tuesday. Traders at first put pressure on the Aussie as the RBA Minutes indicted that policymakers have enough economic evidence to lower interest rates once again at its next meeting.
Optimism over improving banking conditions and a strong rise in trader appetite for risk however triggered a strong rally. Commodity markets which make up over 50% of the Australian export market also posted strong gains.
The rally should continue as long as global stock markets remain firm. Things could shift quickly to the downside if stocks weaken and Australian manufacturing reports come out worse than expected. If this occurs then the Reserve Bank of Australia will have no choice but to slash rates again.
The New Zealand Dollar continued to show strength as it piggy-backed the rally in the Australian Dollar. Like the Aussie, the Kiwi is vulnerable to the bad economy. Bullish traders are enjoying the current short-covering rally but this may not last if New Zealand manufacturing numbers continue to worsen.
The Reserve Bank of New Zealand indicated last week that it will slow down the pace of interest rate cuts. This does not mean that it thinks rates are low enough however. Watch for a possible intervention by the RBNZ to help lower rates in an effort to revive the economy and especially the dismal housing market.
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