The worsening banking crisis in the United Kingdom dominated the news this week in the Forex markets. The week started with an announcement by the British government of a multi-billion Pound plan to provide financial aid to struggling banks and financial institutions. In addition to the bailout plan, the Bank of England was also given permission to flood the market with billions of Pounds in an effort to stimulate the ailing economy. Investors did not like either plan as one promoted the nationalization of banks and the other a potential inflationary scenario. Traders put pressure on the GBP USD all week as it hit a 23-year low against the Dollar on Friday.
Late in the week, news that the U.K. economy had officially entered a recession due to two consecutive quarters of economic contraction did not help matters. For the most part, investors seem more concerned about the nationalization of banks. This news created a fear in the market that the U.K. banking system was on the brink of failure. The developing situation is so bad that some analysts are even calling for a reduction of British debt from AAA. Continue to look for more downside pressure as the rally in gold indicates that the situation is likely to worsen.
There was very little news this week affecting the Euro. The European Central Bank remained quiet throughout the week. Investors are beginning to wonder if the ECB is poised to release a new economic stimulus plan based on what they have learned from the mistakes of the U.S. Fed and the Bank of England.
Fundamentally, the Euro Zone economy remains in poor shape and is expected to deteriorate further as all of its trading partners are experiencing recessions. Pressure is building in on the Euro community to do something about the weakening credit conditions among member countries. Over the past two weeks, the S and P Corp. has slashed the debt-rating of Greece, Spain and Portugal. This could create a potential problem since the ECB is trying to lower rates while these credit strapped countries are going to have to pay more to borrow.
The chart pattern suggests possible bottoming action as the downside momentum slowed down considerably this week. There is a possibility of a breakout to the upside through 1.3085 but the market has yet to show it can form a solid bottom. Do not be surprised by the announcement of a new stimulus plan next week.
Volatility slowed down considerably in the USD JPY late in the week following a strong down move on Wednesday. While the Japanese Yen remains a safe haven currency, traders seem reluctant to press it near 87.00 out of the fear of an intervention by the Bank of Japan. This week the BoJ reiterated its stance on protecting the currency against excessive speculation. Concerns over deflation also prompted hints of an intervention.
In central bank news, the Bank of Japan decided to leave interest rates unchanged at 0.10 percent, but it did agree to start buying corporate debt.
There is no question that the Japanese government wants to stop the rise in the Yen because of the damage a rise does to Japanese exports. The trick is to defend the Yen against the rise without causing excessive fluctuation. Threatening to intervene seems to slow down the market, but it is just a matter time before speculators call their bluff. The best way to get the Yen to break is by increasing trader appetite for risky assets. If the stock market continues to weaken, then look for traders to press .8700. Stability in the global financial markets could help trigger buying in the equity sector. With so many banking problems popping up globally, do not look for traders to become too optimistic over the short-run.
Look for the USD CHF to continue to appreciate next week. The worsening financial crisis has made the Swiss economy vulnerable to global banking problems. Economic weakness in the Euro Zone, Eastern Europe and Russia is likely to continue to put pressure on the Swiss economy which is already in a contraction.
Most of the downside pressure this week against the Swiss Franc can be attributed to the Swiss National Bank's announcement of an intervention because of fears of deflation. This selling pressure could spill into next week since the SNB was not clear as to how aggressive it was going to be.
The USD CAD appears to have put in a short-term top this week. The topping formation started on the daily chart when the U.S. Dollar reversed down after a strong rally in the crude oil market. Earlier in the week the Bank of Canada reduced interest rates by 50 basis points as its projections for growth dropped. The Canadian economy has been weakening because exports to Euro Zone countries are down due to the global recession. In addition, its trade surplus has been narrowing because of the drop in the price of its natural resources namely - gold, crude oil and natural gas.
The strong rally in gold and crude oil late in the week helped to confirm the topping formation. More buying came into the Canadian Dollar after investors began to realize that Canada's fiscal deficit was only 2% of its Gross Domestic Product. This is because Canada has only been cutting interest rates rather than bailing out banks and other financial institutions. Look for the downtrend in the USD CAD to continue with 1.2262 to 1.2143 the first downside target zone.
The strong rally in gold helped stop the bleeding in the Australian Dollar. Trader aversion to risk had been driving the AUD USD down all week as traders sought the safety of less-risky currencies. Aussie exports have been down and putting pressure on the economy. Because of the weakness in the Australian economy and limited growth potential, look for the Reserve Bank of Australia to make an interest rate cut on February 3rd.
The NZD USD remains in a weak position despite the rally on Friday. Fear that the S and P Corp. will cut its debt rating further has been encouraging investors to dump the Kiwi. Traders have also been pushing the New Zealand Dollar lower in anticipation of an interest rate cut on January 29th. Financial market traders are pricing in a cut of as much as 100 basis points on January 29th.
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