The U.S. Dollar finished the week firm against most major markets this week. Much of the buying was related to flight-to-safety buying as the severe decline in global equity markets left investors with no choice but to seek safety in either gold, Treasury bonds or the U.S. Dollar.
News this week included the European Union's rejection of aid to weaker members, the massive reported losses by AIG and HSBC, China's stimulus plan and the possibility of bankruptcy at GM.
The week started with the European Union announcing that it would not provide financial aid to struggling member nations. This news encouraged traders to sell the Euro on the thought that the European Union would not be able to survive unless it backed the financial interests of all members. The situation is likely to worsen as a few of the weaker nations face the prospect of a downgrade in bank ratings and the possibility of default. Both of these actions will hurt Euro Zone banks and spread financial risk throughout the Euro Zone economy.
On Monday, AIG and HSBC reported massive losses. Traders flocked to the U.S. Dollar for safety as another U.S. bailout of AIG sent shockwaves through the global markets and sent a sign that the problems with financial institutions will get worse before they get better.
Wednesday was a bearish day for the U.S. Dollar as speculators sold Dollars and bought equities in anticipation of the announcement of a second stimulus plan by China. Trader appetite for risk increased on the prospect that new spending by China would spur demand for industrial raw materials.
The markets were knocked for a loop on Thursday, however, when China explained that it is satisfied with the results of the first stimulus plan and that its economy is on the road to recovery, thereby reducing the need for a second stimulus package. Additional upside pressure for the U.S. Dollar was provided by news that General Motors would consider bankruptcy if the company continued to lose money.
Finally on Friday, the U.S. Dollar weakened early in anticipation of the U.S. Non-Farm Payrolls report which was expected to show a massive amount of jobs lost. Although the number of jobs lost was near the estimate, the revisions from the two previous months sent the U.S. equity markets lower and the flight to safety rally scenario began once again.
Unless the global and domestic financial markets change significantly for the better over the short-run, continue to look for risk aversion to dominate the markets and the U.S. Dollar to be the safe haven currency of choice.
Traders should also note that the central bank activity of lowering interest rates is just about over as interest rates for the most part have reached near zero. This means that the only major weapon they have left is quantitative easing. This action will flood the world with cash as the central banks will attempt to provide liquidity by buying corporate assets and government bonds. Once all the central banks get on the same page and start to pump money into the economy then look for inflation to rear its ugly head.
The Euro finished the week lower. This market started out on a weak note as the European Union voted not to provide aid to the struggling weaker nations. This was bearish news as speculators brought up the question of the European Union€™s very survival.
Late in the week, the European Central Bank voted to cut interest rates by 50 basis points. Since it has been a little behind the curve, the ECB still has room to cut again.
The British Pound was lower for the week. Initially, traders put pressure on the Pound in anticipation of a rate cut by the Bank of England however sellers piled on the short-side as it became clear that the BoE would have to resort to quantitative easing to help revive the British economy.
Interest rates were cut by 50 basis points to 50 basis points. This may be the last cut for a while. The next move by the BoE is likely to be the buying of securities. Late in the week it announced a purchase of over $105 billion of corporate and government bonds.
Since quantitative easing will flood the market with British Pounds in an effort to open up credit, look for the GBP USD to continue to weaken.
Trading was mixed in the USD JPY this week as oversold conditions early in the week led traders to buy back the Yen. This should be a short-term move as the Japanese economy is too fragile at this time to support a strong rally in the Yen.
With not a lot to work with, look for the Bank of Japan to try to become creative in its efforts to revive its economy. At this time Japan€™s economy is facing a credit shortage so look for the BoJ to try to pump some money into the financial system by purchasing corporate debt or other corporate securities.
The Swiss Franc traded higher last week in a sign that the U.S. Dollar may be beginning to lose its status as a safe haven asset. Let's face it: the U.S. economy is not in good shape at this time and investors have to start looking for another place to invest funds should the U.S. economy deteriorate further and deeper.
The U.S. Dollar could be in the same position the Yen was in a few months ago. Once traders realized the Japanese economy was becoming fragile they sold the Yen. Continue to monitor the relationship between the Swiss Franc and the Dollar to detect repatriation.
The Swiss economy is contracting at this time and the Swiss National Bank is threatening quantitative easing. This may weaken the Swiss Franc against other Forex markets but if it continues to strengthen against the Dollar then this should be treated as a warning signal for the U.S. economy.
The USD CAD rallied last week but stopped short of taking out the main top at 1.3015. A breakout over this price will most likely send this market to 1.35 over the short-run. A failure to breakout over 1.3015 could be a signal of a major top.
Falling commodity prices have been putting pressure on the Canadian economy which relies heavily on exports such as crude oil and natural gas. If the global recession continues to worsen then demand for crude oil will continue to drop, thereby weakening the Canadian Dollar. There were signs last week however that crude oil may be bottoming. This action has the potential to support a rally in the Canadian Dollar.
The USD CAD has been following the U.S. equity markets very closely the last few weeks. A rally in the stock market will likely lead to more appetite for risk which should help rally the Canadian Dollar.
Last week the Canadian government announced a worse than expected decline in fourth quarter GDP. This was bearish news, but since that announcement, the Canadian Dollar has stopped going down. Aggressive traders can start looking for an opportunity to sell the USD CAD.
The Australian Dollar traded up last week buoyed by firm commodity markets and the announcement that the Reserve Bank of Australia left interest rates unchanged. The RBA cited the possibility that the economy was stabilizing as one of the reasons they passed on an interest rate cut.
The lower fourth quarter GDP came out worse than expected but the market seems to be treating that as old news. The announcement that China was on the road to recovery could lead to an increase in demand for Australian exports.
Aggressive bottom-pickers should consider the long side in the AUD USD especially if trader appetite for risk increases. The best sign of bottoming action to look for will be a rally in the equity markets. This action should translate to additional upside pressure in the Aussie Dollar.
News that China's economy is on its way to a recovery could help the New Zealand Dollar find support next week. Based on the trading action last week, it is clear that demand from China and a strong stock market rally is what the NZD USD needs at this time to support a rally.
The Reserve Bank of New Zealand meets on March 12. If it takes its direction from the Reserve Bank of Australia then look for the RBNZ to leave interest rates unchanged. This would be bullish for the New Zealand Dollar.
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