The U.S. Dollar finished the week close to unchanged against most majors as speculators remained on the sidelines while waiting for more concrete details regarding the Obama Administration's banking rescue plan. The Dollar was looking weaker at the start of the week as speculators anticipated that the combination of financial stimulus and banking rescue plans would help lead the U.S. out of a recession more quickly and increase demand for higher yielding assets.
This trading plan was dealt a blow on Tuesday when Treasury Secretary Geithner failed to deliver a speech that would convince global investors that the U.S. had a viable plan to help banks deal with the issue of toxic assets. Geithner's proposal lacked clarity and provided no guidelines as to how the plan would work and who would pay for it. The U.S. Dollar rallied almost immediately as traders once again became averse to risk.
This trend continued until late Thursday when optimism once again returned to the markets after a U.S. government plan to subsidize the mortgage market was leaked to traders. This rumor reportedly included more specific details about a plan for the U.S. government to take toxic assets off the books of ailing financial institutions. The Dollar weakened almost immediately on short-covering in the Forex market as traders lightened up positions in anticipation of more news regarding the plan.
The trend to sell the U.S. Dollar continued on Friday. With a three-day weekend coming up, traders are positioning themselves for an official announcement of the banking rescue plan sometime on Tuesday.
The Euro is still facing downside exposure as news came out this week indicating that the economy is in worse shape than previously estimated. European Union GDP dropped 1.5% suggesting that the European Central Bank will have to aggressively cut rates to revive the economy. Already traders are rumored to be pricing in a 50 basis point cut.
Earlier in the week the Euro faced selling pressure as the financial crisis in Russia worsened. In an effort to revive the Russian Ruble, the government ordered the selling of foreign currencies. This put downside pressure on the Euro. Continue to monitor this situation because of possible European Union exposure to Russian loan defaults.
A short-term top was posted in the British Pound on the daily chart early this week. The subsequent down move ended a week-long winning streak. Traders sold the Pound in anticipation of a worse than expected inflation report.
After the release of the negative report, Bank of England Governor Mervyn King said the U.K. was in a deep recession and would need to see an increase in the money supply to help stimulate spending. The BoE also forecast a 4% contraction this year while looking for inflation to fall to 0.5%.
This news led speculators to believe the BoE would begin a campaign to buy assets from financial firms. With interest rates at 1% and essentially no more room for rate cuts, the BoE has almost no other option left other than attempt to revive the economy by ratcheting up the money supply.
This negative tone was somewhat negated late in the week as the British Pound regained most of its loss from earlier in the week on the news that the U.S. had a workable plan to shore up ailing financial institutions. Currently the up move looks like short-covering but the market is in a position to change the trend to up, provided the U.S. announces a strong banking rescue plan.
The Yen gained back some of last week's loss as Japanese speculators repatriated their currency after a sharp decline in U.S. equities. Additional support came from speculators who paid back borrowed Yen to seek higher yields elsewhere. This trading pattern is likely to continue as long as the stock market remains under pressure. The trend may shift if the Bank of Japan decides to intervene to defend the Yen against excessive gains.
Late in the week news was circulating that the G-7 nations were going to target the Japanese Yen for excessive strength. This is leading to speculation that the Yen may meet selling pressure. Nakagawa from the Bank of Japan also reiterated his plan to act decisively against excessive currency moves.
Last week the Canadian government announced that the monthly deficit declined for the first time in 30 years. This reflected the bear market in key Canadian exports caused by the bear market in commodities. Despite this bearish news the Canadian Dollar did not fall much as speculation is brewing that the Obama stimulus plan may be supportive to key industrial metals.
This week's move in the Canadian Dollar will be dictated by the market's acceptance of the Obama stimulus plan and the U.S. banking rescue plan. There should be an increase in demand for higher yielding commodity-linked currencies if both of these plans gain global acceptance.
At times last week the USD CHF showed signs of topping. Trading can best be described as mixed. The Swiss Franc saw weakness when the Dollar regained its status as a safe haven currency. Additional weakness in the Swiss Franc was felt from the constant threat of a Swiss National Bank intervention.
The Swiss Franc showed strength last week after the release of bad news from UBS. This may be a sign that the worst of the banking crisis in that country may be behind. Look for the USD CHF to break if trader appetite for risk increases and the U.S. Dollar loses its status as a safe haven investment.
The Australian Dollar traded in a tight range last week. Selling pressure came after trader appetite for risk dropped after the U.S. failed to deliver a workable banking rescue plan. This reduced demand for commodity-backed currencies.
As long as no viable banking plan exists, look for downside pressure in the AUD USD. The announcement of a new clearer plan could help to support the Aussie. News late in the week that the Australian Senate approved a new $42 billion stimulus plan may help boost the Australian Dollar this week. This new plan is expected to lower interest rates and help homeowners.
The NZD USD felt pressure this week as trader appetite for risk diminished. News that the U.S. banking plan was unacceptable because it lacked clarity and details put pressure on the New Zealand Dollar. In order for this market to rise it needs support from demand for higher risk assets. As long as the U.S. economy remains wallowed in its recession look for more downside pressure on the NZD USD as traders will seek the safety of the U.S. Dollar. If the U.S. announces a concrete plan to help shore up its financial system then look for the start of a rally.
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