Expectations of continued weakness in the Euro Zone were supported on Wednesday by a report that showed Euro Zone lending activity had tightened up. Worsening financial conditions could actually start accelerating as economic numbers are starting to more frequently lean toward the negative side.

Traders are expecting worsening economic numbers in the very near future and as bets of a full basis point rate cut by the European Central Bank have increased in the credit markets. Many traders feel the ECB will act aggressively in an effort to get ahead of the curve. For months traders have nagged the ECB for its slow response to the global financial crisis. After a series of bad economic reports, it seems that the ECB has finally grasped the magnitude of the financial crisis gripping the Euro Zone nations and is willing to act accordingly.

The British Pound continued to feel selling pressure following Wednesday's failed auction. By failing to support the Bank of England's latest auction, investors sent a message to the BoE and the government that they were losing confidence in recent attempts to revive the economy

A worse than expected retail report on Thursday renewed talk that the BoE will resume its aggressive quantitative easing policy in an effort to revive the economy. On Wednesday the BoE was waffling as to whether to continue the program or halt it as U.K. CPI figures came in higher than expected.

Higher crude oil prices and a stronger stock market failed to attract much buying interest in the Canadian Dollar on Thursday. While other commodity based currencies posted sharp gains, the Canadian Dollar wallowed in a sideways trade as stronger than expected U.S. economic reports this week could be indicating the U.S. economy is bottoming.

Further downside pressure was put on the Canadian Dollar on speculation that the Bank of Canada was still considering an interest rate cut in an effort to revive its economy. Fundamentally this market needs to ignore the performance of the U.S. economy and focus on generating stronger demand for Canadian exports such as crude oil, natural gas and lumber. If demand for these commodities doesn€™t pick up then the BoC will be justified in slashing rates again.

The Bank of Japan and the Japanese government seem pleased with the weakness in the Japanese Yen. They feel that a weaker Yen is needed to attract foreign interest in Japanese exports. Unfortunately, a cheaper Yen will not automatically trigger buying from Japan's biggest customers in China, the U.S. and Europe. Consumers in these nations have to be willing to spend to create the demand. The high Yen is not the only reason why exports are down. The economies in the U.S. and the Euro Zone will have to recover before the Japanese economy bottoms.

Oversold conditions seem to be the only reasons why the Yen would rally at this time. As long as trader appetite for risk is increasing, there will be no interest in owning the low-yielding Yen.

The USD CHF seems poised to rally again as demand for the Swiss Franc is waning. With the Swiss National Bank committed to a weaker Swiss Franc, large traders seem unwilling to trade against the central bank and are more likely to keep selling on any rally. The pressure will be on the Swiss Franc until economic numbers show that the economy is recovering. Until then look to sell rallies if given the opportunity.

The strong surge in commodity and equity markets triggered strong demand for the AUD USD on Thursday as traders aggressively sought the high-yielding asset. The rally has put the Aussie in a position to post its largest monthly gain in 24 years. At this time the Australian Dollar is up nearly 10% for the month - its biggest monthly gain since 1985.

The rally in the Aussie has raised some concerns about its high value curtailing demand for Australian exports. Traders are taking advantage of the interest rate differential at this time which favors the Australian Dollar over the U.S. Dollar. Once it gets to the 70.50 level there may be profit-taking on the fear that the Reserve Bank of Australia may do something to trigger a break. The RBA does not want the AUD USD to get too high or the lack of demand for Australian exports will hurt any chances of a recovery in 2009.

The New Zealand Dollar is poised to post its largest monthly gain since 1985. The strong rally in the NZD USD on Thursday put the Kiwi up close to 15% for the month. Today€™s rally was triggered by a stronger than expected 2008 4Q GDP Report. Pre-report estimates had most economists predicting a decrease of 1.1%. The reported contraction of only 0.9% sent the NZD USD soaring sharply higher.

There is no question that the increased demand for higher yielding equities and commodities is driving this market higher as traders in the U.S., the U.K. and Japan are searching for higher yielding assets as their currencies hover near 0%.

The strong rally in the New Zealand Dollar has traders reducing their expectations of a rate cut of only 25 basis points next month. Traders are becoming more concerned with each price rise that the 2009 4Q recovery forecast by the Reserve Bank of New Zealand is not likely to occur as the higher priced Kiwi will discourage foreign demand for New Zealand exports.

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