The U.S. Dollar lost much of its luster as a safe haven asset last week as the strong rally in the stock market whet trader desire for more risky, higher yielding assets. Commodity-based currencies were big gainers this week as they benefitted from both the rally in equities and the stronger commodity markets.
The Euro was a big gainer last week against the U.S. Dollar. Much of the move was most likely short-covering because there was no bullish economic news out of the Euro Zone last week. Falling production, decreasing demand for Euro Zone produced goods and unemployment issues still remain major concerns for the European Central Bank.
The ECB is under pressure to lower interest rates close to zero like the majority of the central banks. Although for months it had been concerned about triggering runaway inflation, it has now shifted its focus to preventing a deflationary environment. Aggressive actions by the Swiss National Bank may have also lit a fire under the ECB that it has to respond to.
The ECB has talked about using creative ways to stimulate the economy but have yet to reveal anything unique to the market. There had been talk about quantitative easing, but with 16 different countries in the European Union, it is difficult to decide which country's assets to buy.
The British Pound had a mixed week versus the U.S. Dollar and ended up down for the week. The up days were triggered by the strength in the global equity markets. On those days the U.S. Dollar tended to trade weaker rather than the British Pound stronger. All in all it is safe to say that the upside activity was short-covering rather than fresh buying.
The downside pressure on the GBP USD was triggered by the start of Britain€™s quantitative easing program. For weeks the Bank of England had been talking about it, but it finally took action when it aggressively purchased government assets. This is a risky strategy but deemed necessary at this time by the Bank of England. Quantitative easing - which is essentially printing money - is considered high risk because it can trigger inflation if the release of cash is not monitored and controlled.
The USD JPY was under pressure most of the week but was able to close nearly unchanged after a spectacular end of the week rally. This market bottomed on March 12, the same day that the U.S. announced a better than expected retail sales report. This news was considered bullish and drove the Yen down and the stock market higher.
The Japanese economy is in shambles at this time, which means that any good news regarding the U.S. economy will trigger a bullish response in the USD JPY. Look for more downside pressure in the Yen if reports continue to show the U.S. economy improving.
It is no secret that the Japanese government wants to see a weaker Yen in order to make Japanese goods more attractive. Recent reports have proved that the economy is weak and expected to deteriorate more. GDP may be declining at an annual rate of 12%. Exports have been sharply lower led by weak auto sales and the current account showed a deficit for the first time in 13 years. Look for the Yen to continue to weaken over the long-term until there is increase in demand from the Europe and U.S. This is not likely to happen until both economies recover from recessions.
Bank of Japan officials note that the Japanese economy is very similar to the Swiss economy in that both rely heavily on exports. It is a safe bet to believe that the BoJ is considering intervention as a major tool to drive the Yen lower and perhaps increase demand for exported goods.
The USD CHF rose sharply higher last week after the Swiss National Bank sent a message to the world that they were deliberately weakening their currency to help boost the economy. In an aggressive move, the SNB simultaneously cut its benchmark interest rate to 0.25% and intervened. This move also sent the EUR CHF sharply higher as well as the gold market as it flooded the market with cash.
Although the Swiss National Bank remains committed to driving the Swiss Franc lower, more intervention is unlikely but not completely out of the question. The next move by the SNB will be quantitative easing in the form of the purchase of government securities.
The Canadian Dollar posted a strong gain last week versus the U.S. Dollar. The closing price reversal down on the weekly chart is also a strong indication that the USD CAD is forming a major top. A follow-through to the downside will confirm the top and set up the USD CAD for a further decline.
The strong surge in the Canadian Dollar was attributed to the rally in both equity and commodity markets. The strong equity markets increased trader appetite for risk while the rally in crude oil ahead of this weekend's OPEC meeting drove up commodity prices. Canada's heavy reliance on energy helps boost Canadian exports. Lower commodity exports have been helped decrease the Canadian trade surplus.
Despite a weaker than expected employment report, the Canadian Dollar was able to post a gain late in the week as market participants chose the rising stock and crude oil markets as their indicators. Friday's action offered clues as to what traders will most likely be focused on in the upcoming week: equity markets and energy markets. The USD CAD is likely to trade lower if the equity rally continues and if OPEC can cut production enough to drive crude oil to $50.00.
The AUD USD was able to post a large gain last week. The primary source of the bullishness was stronger global equity markets. As trader confidence grew with each new high in the stock market, trader appetite for higher risk, higher yielding assets increased
The Australian Dollar has been building a support base for about two weeks as the recent action by the Reserve Bank of Australia sent a message to the markets that the economy may be improving at a much better pace than previously thought. At its last meeting, the RBA left interest rates unchanged while talking up the possible improvements in the economy because of its last stimulus plan.
Despite a recent report showing that GDP had dropped more than expected, traders seem to believe that the GDP number was old news and that the economy is probably strengthening. Speculators are certainly betting on this scenario as they drove prices higher last week.
Look for the AUD USD to continue to remain strong as long as it gets support from higher equity markets and rising commodity prices.
The Reserve Bank of New Zealand cut interest rates to a historically low 3.0% last week while announcing further cuts may be necessary but at a much slower pace. The comment that the current easing cycle may be ending helped support the NZD USD but it was increased trader appetite for more risky, higher yielding assets which drove it higher.
In order to get this economy rolling, traders still want to see a turnaround in some of the economic numbers. RBNZ Governor Bollard can put a hawkish spin on interest rates but at some point his decision is going to have to be backed-up by better export and manufacturing figures.
Look for the rally to continue into next week if trader appetites for risk increases, but if manufacturing reports continue to show weakness, short-sellers will hit the NZD USD hard once again.
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