On Tuesday Canadian Dollar investors and traders will be focusing on Canada's budget for guidance over the short-term. This budget will be an important indication as to how well the Canadian economy will do going forward. The year long decline in the Canadian Dollar has been a concern as commodity prices led by crude oil declined severely in 2008. Canada relies on its exports to generate income and with the many of its trading partners going through severe recessions its trading surplus has decreased considerably.
Feeling the threat of a loss of power, on Monday, Canada's minority conservative government pledged to spend what is necessary to fix the economy. This new proposed stimulus plan is expected to help rebuild infrastructure, protect the stability of the financial system and ensure credit.
The USD CAD weakened on Monday following the statement to boost the economy and the rise in crude oil. Traders will be watching tomorrow to see if the trend conditions. If news comes out which shows the Canadian budget deficit is better than competing nations then look for more upside action in the Canadian Dollar.
The Euro rallied versus the Dollar on Monday following a dramatic turnaround in the British Pound. Last week traders were putting pressure on the Euro as traders sought the Dollar for safety. Threats of a banking collapse in the U.K. encouraged investors to avoid risky assets and seek the Dollar as a safe haven investment. As the risk of a bank collapse abated early Monday morning, traders became less averse to risk.
Although the market seems poised for a short-covering rally, the Euro is still vulnerable to more downside risk. The Euro Zone economy is still deteriorating and the possibility of more debt-rating cuts for some members is weighing on the minds of investors. At this time the European Central Bank is also contemplating another rate cut at its next meeting in February. Oversold conditions will most likely support the long side of the market for a few days, but economic reports out of the Euro Zone need to be watched carefully for weakness that will almost assure traders of a rate cut by the ECB in February.
The GBP USD rallied sharply higher on Monday following a steep decline last week. Most of the rally was probably triggered by short-covering as the U.K. economy and financial system remains too weak to initiate major long positions.
The Pound found support early Monday morning following news that Barclay's Plc recorded more revenue than expected. This showed the global investing community that they were strong enough to support themselves and would not have to rely on government aid.
Last week traders punished the Pound on expectations that they would have to tap the government money spigot to stay afloat. This led to speculation that the U.K. system would become nationalized. The news today helped to alleviate downside pressure in the Pound and other currencies as traders unwound long Dollar positions put on to take advantage of the Dollar's safe haven status. Look for more short-covering on Tuesday, but do not get too aggressively long because the economy and banking system are still vulnerable to downside risks.
The USD JPY rose on Monday as bearish financial conditions eased and traders sought more risk in the marketplace. Trading has been light and volatility low over the past week in the Japanese Yen. Some traders feel the threat of an intervention by the Bank of Japan has become too real to keep pressing the Yen higher.
Weakening exports and economy still remain key concerns of the Bank of Japan. They are also facing criticism by the Japanese government because of their inability to curtail the Yen's rise. Look for more aggressive action by the BoJ over the short-run to combat the possibility of deflation. This action may come in the form of manipulation of the money supply or an intervention.
Swiss investors reversed its recent downtrend with a rally on Monday. Last week's break was triggered partially by an intervention by the Swiss National Bank and trader concern for safety after the threat of a banking collapse in the U.K.
Last week the SNB indicated that the threat of deflation was real and that they would have to lower the value of the Swiss Franc in a defensive move. This triggered downside pressure in the Swiss throughout the week.
Monday's rally looked as if the selling pressure was over as traders demanded more risk as the banking crisis in the U.K. has been avoided at least temporarily. Look for the short-covering rally to continue unless another intervention takes place.
Trader appetite for risk increased as stock indices traded better on Monday following last week’s break. Stronger commodity prices also helped support the AUD USD. The expected rate cut on February 3 by the Reserve Bank of Australia seems to be priced into the market. This gives the Aussie room to rally if conditions are right. Watch for strength in the commodity markets to support the Australian Dollar.
The NZD USD remains in a weak position. Fear of another debt-rating cut is hurting the currency. Stronger commodity markets may help to curtail losses, however, the economy is still under pressure. Look for a rate cut by as much as 100 basis points by the Reserve Bank of New Zealand on January 29 to help revive the economy.
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