Overall trading in the U.S. Dollar was mixed on Thursday as traders had a lot of economic news to digest. Investors are still trying to decipher the FOMC information from yesterday's announcement. Many thought that coming out of the two day meeting the Fed would be clear in its decision to back mortgage debt and initiate a long-dated treasury buyback program, but this was not the case. The hesitancy by the Fed has made investors once again averse to holding riskier assets.
Although President Obama's financial plan passed a U.S. House vote late yesterday, the fact that no Republican voted in favor of the bill indicates that it may have trouble passing the Senate. The Republicans reportedly want to see more tax cuts. This scenario has also made investors nervous as it is being perceived as a sign of more difficulties ahead for the Obama administration as it begins its efforts to revive the U.S. economy and fix the U.S. financial system.
The financial stimulus plan as it stands mentions the possibility of the creation of a toxic asset bank but contains no concrete plans as to how it will work although the FDIC is expected to run it. Some critics of the plan say that the U.S. commitment to the financial sector may balloon into the trillions of dollars. This would definitely put a strain on the fiscal budget and could trigger a massive rise in interest rates.
The action by the Fed is particularly disturbing because it seems that it is not willing to act independently of the new administration at this time. One can only hope that the Fed is not waiting for the new stimulus plan to become law before initiating its next move.
The negativity of the developing situation is driving investors back to the Dollar as it regains its safe haven status.
The Dollar gained ground on the Euro in a big way on Thursday. For several days the EUR USD has been in a holding pattern with a slight bias to the upside. Some say the buying was coming from the possibility that the European Central Bank would leave interest rates unchanged at its next meeting on February 5. Others were buying the Euro in anticipation of good news from the U.S. Fed and government regarding an economic stimulus plan. When this news failed to come about the Euro buying stopped.
The flight to the safety of the Dollar triggered the initial selling pressure, but later more shorts piled on when news hit the wire that investor George Soros warned that the Euro may not survive unless the European Union comes up with a global plan to deal with toxic assets.
Investors are still waiting for a sign that the ECB will cut rates on February 5. Traders seem to be willing to speculate it will, but the size of the cut is being debated. Investors also want to see the ECB address the matter of the deteriorating Euro Zone economy and the debt-rating reduction of EU members Greece, Spain and Portugal.
The British Pound continued to add to its gain for the week as short-covering continued in this market. The market is slowly recovering much of the recent loss attributed to speculation that the U.K. government will nationalize struggling banks. This speculation came to an end when Barclays Bank issued better than expected financial statements. The news that it would not have to tap the government for additional funds to stay in business initiated the start of the short-covering rally.
Although the GBP USD has rallied for four days, the trend is still down. With the economy in a recession triggered by a bad housing and mortgage market, traders are going to begin to look toward the U.K. government and the Bank of England for more stimuli to revive the economy. Technically, the Pound is merely retracing a prior down move. The charts are indicating that once this short-covering rally stops, the market will be poised for a corrective break to retest the recent bottom.
The USD JPY gained ground on Thursday. Traders seemed more willing to buy the Dollar than the Yen in a flight-to-quality move. Lately when the stock market has been down and trader appetite for risk has waned, traders have sought the safety of the Yen. Today’s action could be indicating that the Japanese economy has hit a level where investors feel it is too risky to own Yen. Furthermore, intervention threats by the Bank of Japan may have finally been taking seriously by traders. For weeks the BoJ has been threatening to sell Yen in an effort to pare its value. The rising Yen has been killing the Japanese export market. Today's trading action indicates that the trend may be ready to turn higher for the USD JPY.
Lower commodity prices led by weakness in energy and grain markets put pressure on the Canadian Dollar. The USD CAD has reversed the downtrend that began late last week. Earlier in the week Canada announced its first budget deficit in ten years. Vows by the Canadian government to defend the economy with whatever means possible have done nothing to support the Canadian Dollar. The narrowing trade surplus and falling exports are putting pressure on the economy. Falling commodity prices continue to indicate the possibility of deflation.
The Swiss Franc traded flat against the U.S. Dollar on Thursday. For two weeks the Swiss National Bank has expressed concern about the rise in the Franc. They have even threatened to intervene with massive amounts of selling pressure to knock its value down. Even as late as yesterday the SNB was reiterating its stance. Today, however, SNB President Jean Pierre Roth reversed the tone and said he did not see any overshooting of the currency. This means that he has taken the threat of intervention off the table.
The Swiss Franc rallied on the news to finish basically unchanged versus the Dollar. Although the comments helped support the Franc, financial conditions in Switzerland have deteriorated over the short-term. The economy is still in a contraction and the higher Franc is hurting export sales. Short-covering may have triggered the rally today, but I suspect new shorts will be willing to step in at new levels soon.
The Australian Dollar fell against the Dollar in New York. Traders cite the uncertainty in the U.S. economy and the inability to present a clear direction for new attempts to revive the U.S. economy as the main reasons for the weakness. Traders are once again selling riskier assets and seeking the safety and security of the U.S. Dollar. News that New Zealand cut its benchmark rate by more than expected also put pressure on the Aussie. The move by New Zealand opens the door for a Reserve Bank of Australia cut by as much as 100 basis points at its next meeting.
The weakening economy led by falling exports and lower commodity prices has led the Reserve Bank of New Zealand to cut interest rates by 1.5%. This cut was more than expected and sent the NZD USD sharply lower. Look for more downside pressure as the deteriorating global economy is expected to send commodity prices lower. A falling stock market could even accelerate the down move as investors will become more averse to risk and aggressively sell commodity-linked currencies like the New Zealand Dollar.
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