Pressure could be on the Euro this week as recently released economic numbers are still indicating a deepening and widening recession in the Euro Zone economy. The recent weakness is just further proof that sitting on your hands doesn't work when it comes to stimulating an economy. Investors are still voicing their disgust at the pace at which the European Central Bank has acted toward providing stimulus to the economy whether through interest rate cuts or economic stimulus.
The recent rally in the Euro is suspect as it actually represented a weaker Dollar rather than a stronger Euro. The short-covering rally was triggered by the news that the Fed would provide additional liquidity to the U.S. economy by purchasing bonds and mortgages. Now that the EUR USD market appears to have absorbed all of the initial euphoria, conditions are stabilizing and traders are once again focusing on economic conditions. A weaker stock market could be indicative of greater trader aversion to risk which could trigger more buying in the Dollar and the selling of higher risk, higher yielding currencies like the Euro.
Look for the Euro to weaken this week as traders may begin to price in an aggressive rate cut or some form of aggressive quantitative easing by the European Central Bank at its next meeting on April 2 in an effort to revive the Euro Zone economy
The short-term rally in the GBP USD could be over as the weak U.K. economy has once again triggered renewed talk for another round of quantitative easing by the Bank of England.
Last week this market was on a rollercoaster as traders took bullish directions from a stronger than expected consumer prices report and bearish directions from a failed auction and poor retail sales. Investors are continuing to lose confidence in moves triggered by the Bank of England and the U.K. government. Look for the possibility of drastic action by the BoE in an effort to revive the economy. The Pound is expected to drop over the short-run as quantitative easing will pump more money into the economy.
Canadian Dollar traders are still waiting for confirmation that the economy is improving. The recent rally in the Canadian Dollar has been based on the strong equity markets and higher crude oil. This leaves it susceptible to a break if these two outside markets begin to weaken. There is already talk that demand issues will pull crude oil back down. With earnings season about two weeks away, equity traders may begin to take a little off the top as the current rally appears to be running out of gas.
Traders are beginning to wonder if the USD CAD will begin a corrective move up this week. Talk is circulating that traders don't want to commit too much to the current rally in the Canadian Dollar until they see what the Bank of Canada has in store at its next meeting on April 21. Canadian financial markets are drifting toward a cut that would take rates close to 0%.
The USD JPY is expected to continue to post gains. The stronger U.S. economy and the possibility of a break in equity markets may have risk averse investors return to the safety of the Dollar. Furthermore, the Bank of Japan and the Japanese government remain content with a weaker Yen.
At this time the BoJ seems satisfied with the pace of the decline in the Yen. Its feeling is that a weaker Yen will attract foreign buyers. Others feel that buyers will not return until the economies in the U.S. and Europe improve. If the BoJ does anything, it will most likely be quantitative easing or an intervention which would drive the Yen lower. At current levels, the only reason for a rally in the Yen will be technical in nature as this market is getting close to oversold.
Threats of another round of intervention or quantitative easing by the Swiss National Bank are two reasons why Swiss Franc traders have avoided the long-side. Other than the rally because of the Fed's announcement to buy treasuries and mortgages, the tone of the Swiss Franc has been negative. Just days before the Fed's announcement the SNB cut rates and intervened, sending a message that it wanted a lower Swiss Franc.
News that the European economy was continuing to weaken is a sign that demand for Swiss produced goods will continue to wane. This means that the SNB may have to intervene again in an effort to drive the Swiss Franc lower. Like the Bank of Japan, its thinking is that a lower Swiss Franc will increase demand for Swiss goods. Sure, the action will trigger a rally in the USD CHF, but until consumers start spending in both the Euro Zone and the U.S., demand will continue to weaken.
Nervous Australian Dollar traders may lighten up positions following the huge rally this month. Traders will be watching the action in both commodity and stock markets to see if there is any weakness developing.
Some traders feel that the Australian economy is not strong enough to maintain the pace of the current rally. This is probably true as the rally has mostly been driven by increased appetite for risk rather than an improving economy.
The spike up in the NZD USD has put this market in technically overbought territory. The surprise improvement in 2008 4Q GDP triggered a sharp rise but also caught the eye of the Reserve Bank of New Zealand which would prefer a weaker currency during the current economy recovery. Talk that the RBNZ may intervene to weaken prices could pick up this week which is likely to trigger profit-taking.
More economic reports are necessary to support the current rally. The GDP report is old news as it represents backward thinking. Traders should be looking ahead and if the economy doesn't start showing signs of improvement to support the current rally then look for the start of a profit-taking break.
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