The U.S. Dollar lost ground to all the major currencies on Tuesday on mixed fundamentals. There was no theme in the market today as many of the currencies reacted to their own individual news. After the tone was set in each market, comments from U.S. Treasury Secretary Geithner helped move the markets but I wouldn't say he was the main catalyst of today's action.
Geithner basically calmed the selling pressure in the U.S. banking sector today by stating that the vast majority of U.S. banks are well capitalized. He also tried to squash rumors that several banks have inadequate capital levels. The general theme surrounding his commentary was that banks have enough money to keep lending, but that bad debts are slowing the recovery. If anything his commentary encouraged traders to take on a little more risk.
Another report which may have neutralized the Geithner comments was the report from the International Monetary Fund of a possible $4.1 trillion in toxic debt still floating in the global banking and financial institution pipeline. Although this report was actually leaked about two weeks ago, Forex traders have to stand up and take notice. The report didn't make it clear which banking systems have the most exposure, but one has to believe that heavy exposure in emerging market banks could spread quickly through the global economy with the European Union banks facing the most exposure.
The Euro was strong most of the day following an almost week-long selloff. News that the ZEW German investor confidence number was positive for the first time since July 2007 triggered the start of a short-covering rally. This move was basically short traders lightening up positions that had been built on the notion of a lack of confidence in the European Central Bank.
Longer-term traders appear to be shying away from the long side of the Euro because it is unclear whether the European Central Bank will cut rates below 1%. Additionally, investors are not certain as to when and how the ECB will use quantitative easing to revive the Euro Zone economy.
Trader confidence is down and the ECB seems to be in tough position. If they don't cut below 1% then traders will say they want more. If they leave rates unchanged then traders will say the ECB isn€™t acting fast enough. Either way downside pressure should continue on the Euro.
The British Pound posted a slight gain on Tuesday as the weaker Dollar led traders to lighten up short-positions. News that two major U.K. retailers posted better than expected earnings reminded traders that it is possible a recovery in the economy is starting.
The news was enough to trigger short-covering, but in order for the trend to turn higher the economy has to show improvements in the housing and mortgage markets. Traders will remain skeptical about the economy until the Bank of England begins to curtail its quantitative easing plans.
The Canadian Dollar started sharply lower with the market hitting a three week low following the Bank of Canada€™s announcement of an interest rate cut to 25 basis points. Although some traders claim this was a surprise, the real surprise in my opinion was the BoC's statement calling for interest rates to stay at this level until June 2010.
In its official statement the BoC predicts a much deeper recession than previously forecast. It expects to see the economy contract by 3% this year. This is versus a previous forecast of a 1.2% contraction earlier in the year.
Canadian Finance Minister Flaherty said that the downward revisions do not mean that more economic stimulus is likely. Canada has already committed $32 billion toward stimulus for the next two years. Flaherty also said that 2009 will be a difficult year and some of the problems may spillover into 2010.
Trading could be tight over the next couple of days and there may even be a short-covering rally as traders lighten up positions in the market ahead of the announcement of the BoC's new quantitative easing plan on April 23.
Tuesday's action indicated the possibility of the start of the short-covering rally following the reversal to the upside after U.S. equity and crude oil markets turned positive.
The Japanese Yen could be under pressure if the stock market begins another leg higher. Traders will be looking to sell the Yen and invest in higher yielding markets in carry trade activity. At this time the economy is still bad to warrant any buying interest. News that China's economy may be going through a contraction is expected to worsen the economy in Japan.
The rally in the Euro took some of the pressure off the Swiss National Bank to intervene in the market. The SNB has issued a warning that it stands poised to weaken its own currency if it gets too much higher. The purpose of the intervention is to make Swiss goods cheaper and to counter the effects of deflation.
Although there are still major concerns about their economies, both the New Zealand and Australian Dollars posted gains on Tuesday. An increase in trader appetite for risk helped attract buyers to the higher yields. Most traders feel there is the potential for more downside as the economies of these two countries are still weak and may weaken further now that there are indications of contraction in the Chinese economy.
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