On Wednesday, President Obama announced his new housing bailout plan designed to help homeowners behind on mortgages. The President provided more details to the plan originally proposed by Treasury Secretary Geithner last week. At that time the global community failed to embrace the plan because of the lack of clarity and conviction from Geithner. Last week the equity markets broke hard and traders flocked to safer assets such as gold, Treasury bonds and the U.S. Dollar.
Today the markets reacted in a similar fashion as stock markets broke sharply lower and the U.S. Dollar and gold remained strong. This trend is likely to continue until there are coordinated efforts by the central banks and governments to come up with stimulus packages that have an immediate effect on the global economy.
Traders are buying the U.S. Dollar because it is the best currency available. Investors are convinced that the economy will continue to weaken in Japan, Eastern and Central European banking issues will plague the Euro and commodity-linked currencies will remain under pressure until demand returns. At this time long the U.S. Dollar is the safest play because the U.S. continues to take a proactive approach to reviving the economy.
The EUR USD continued to remain under pressure. The combination of a weakening Euro Zone economy and the threat of downgrades of Eastern and Central European banks tied to the Euro Zone are putting tremendous pressure on the Euro at this time.
The European Central Bank is getting hit from all sides with major issues that could exacerbate the break in the Euro. Currently, ECB members have to make decisions regarding interest rates, bailout struggling members of the European Union and protect banking interests from the developing financial crisis in Eastern and Western Europe.
The pressure is certainty on the ECB to act not only decisively, but also swiftly as it is faces heavy criticism from investors who feel it is moving too slowly in its efforts to revive the Euro Zone economy. The weakness in the Euro is an indication that traders are betting the ECB will not make the right move at the right time.
The British Pound traded lower on Wednesday as traders are beginning to lose confidence in the ability of the Bank of England to revive the worsening U.K. economy.
News that all members of the BoE voted for an interest rate cut at this month’s meeting encouraged selling pressure. This was a strong indication that there is agreement on how bad the economic situation has developed over the past several months.
Also discussed at the last meeting was the possibility of the BoE buying U.K. debt. This use of an alternative policy to stimulate the economy was also a sign of how bad the economy has become. With the BoE unlikely to cut rates to zero, it has to become more aggressive with its alternative suggestions to push interest rates down.
Look for more plans from the BoE to increase the money supply in an effort to lower interest rates to trigger the start of an economic recovery.
The weakness in the Japanese Yen is another sign that global investors have lost confidence in Japan's ability to recover from the current recession. The Japanese economy relies on exports to most developed countries. Weakness in the U.S. economy led by lower consumer consumption is leading traders to believe the Japanese economy will struggle for some time to come.
The USD JPY showed strength following the announcement by President Obama of a U.S. plan to bailout struggling homeowners. This was clearly a sign that the move by the U.S. will decrease the demand for the Yen as a safe haven currency. This news coupled with the bad economic data coming out of Japan increases the odds that selling pressure on the Yen is likely to continue.
The USD CAD traded in a tight and narrow range on Wednesday following a couple of days of expanded ranges. The recent rally was triggered by the thought that the weakening global economy will continue to limit demand for commodities.
Lower grain prices as well as crude oil and natural gas continues to put pressure on the Canadian economy which relies on strong exports. Recently it was announced that the trade surplus narrowed and just last week the Canadian government announced a monthly deficit for the first time in 30 years.
Speculation is building that the recent surge in the Baltic Freight Index will lead to greater demand for commodities. There has been no sign of this demand at all. An oversold crude oil market combined with the possibility of a production cut by OPEC may trigger a short-covering rally, but sellers may be waiting for this move.
The Swiss Franc continued to weaken as traders bought the U.S. Dollar as a safe haven investment. Speculators are also selling the Swiss Franc because of the possibility of Swiss bank exposure to downgraded banks in Eastern and Central Europe. The possibility of credit issues springing up in Russia is also leading to buying of the USD CHF.
Australian Dollar traders are beginning to believe that the developing banking crisis in Eastern and Central Europe will lead to the worsening of the global recession and trigger selling of higher-risk currencies. The AUD USD is receiving pressure from two ends: the falling stock market and lack of demand for commodities.
Global equity markets are expected to continue to feel downside pressure as corporate earnings are expected to continue to fall. The global recession is leading to the lack of demand for commodities. This news is having an immediate impact on the Australian economy which relies heavily on exports. The collapse of the Japanese economy has been especially hard on the Australian export market.
Despite recent efforts to revive the economy through a combination of interest rate cuts and financial stimulus, it looks as if the Australian economy is going to continue to weaken until it gets some support from its trading partners.
Lower demand for higher risk, commodity-linked currencies continued to hurt the NZD USD on Wednesday. Short speculators are betting that the New Zealand economy will continue to weaken because of the lack of support from its trading partners.
The possibility of a banking crisis in Eastern and Central Europe is also starting to fuel speculation that trader appetite for more risky assets will drop drastically. This could lead to more selling pressure. Expectations are for the New Zealand Dollar to test its low for the year at .4959. Technically, the market is oversold. Look for a short-covering rally to sell.
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