The U.S. Dollar opened the day session weaker against the majors. The weakness was triggered by speculation that the Fed would announce plans to buy long-dated treasury debt. The Dollar strengthened late in the trading session, however, after the FOMC made its future plans to buy back treasuries clear. Forex traders want the Fed to disclose its actions. Traders are poised to take the Dollar lower if the Fed provides the optimism to seek higher-yielding, higher-risk assets.
Forex trader appetite for higher-yielding currencies was also up today as optimism is building that the Obama stimulus plan will be passed soon. The main focus of the plan is on the creation of a toxic asset bank. Speculators were selling Dollars in anticipation of such a plan.
The Euro traded higher most of the day in anticipation of an FOMC announcement to purchase long-dated treasuries. EUR USD traders liquidated positions after the Fed failed to give them any indication as to their future plans. Once the Fed's plans are published, look for the Euro to rise as trader appetite for higher yielding currencies will likely increase.
Speculators are trying to figure out which way the European Central Bank will lean when it announces the results of its next meeting on February 5. Traders are debating at this time whether the ECB will refrain from a rate cut or cut rates by as much as 50 basis points. This is accounting for the limited buying of strength and the recent sideways action.
British Pounds were mostly higher on Wednesday. Earlier in the week, this market reversed its downtrend on the news that Barclays would not have to use government funding to stay in business. The better than expected news from Barclays helped provide relief to a market which had been attracting heavy selling pressure because of speculation that the U.K. would nationalize some of its banks.
News that the U.S. may create an entity to isolate bad performing assets and remove them from the books of financial institutions is also leading to increased trader appetite for higher yielding assets. Citigroup's recommendation to buy Lloyds Bank Group also lent some support to the markets as it eased concerns about the need for government aid to bailout struggling banks.
The rally in the GBP USD is expected to be short-lived however, as the U.K. economy is going through its worst recession in decades led by a bad housing market and high unemployment.
The Canadian Dollar remained strong as trader appetite for commodity-linked currencies increased on speculation that the Obama administration would create a bank for bad assets. Speculators are reacting to the possibility that the new economic plan from the U.S. will drive up future demand for commodities. Additional support is also being supplied by the building optimism that the Canadian government will do whatever it takes to stimulate the Canadian economy.
The Japanese Yen traded lower as equity markets surged as traders increased their appetite for risky assets. Equity traders reacted to the new plans introduced to revive the U.S. financial system. The weaker Yen was welcomed by the Bank of Japan. A weaker Yen helps improve exports of Japanese goods.
The Swiss Franc was firm early in the trading session but quickly weakened when the Fed failed to give a clear indication as to what it would do to revive the U.S. economy. Additional selling pressure hit the market when Swiss National Bank President Jean-Pierre Roth said the central bank is watching the Franc’s exchange rate closely. This led to speculative selling that the SNB is poised to intervene in an effort to halt the appreciation of the Franc. Swiss banking officials reiterated their comment from January 22 when they said they were prepared to sell an unlimited number of francs at fixed exchange rates. With this statement hanging out there, continue to look at the short-side of this market.
Increased appetite for risk helped buoy the Australian Dollar on Wednesday. Traders were looking for higher yielding assets after strong gains in the equity and commodity markets. News that consumer prices dropped again last month curtailed some of the gains. With the economy still showing signs of limited growth look for more downside pressure in anticipation of an interest rate cut by the Reserve Bank of Australia at its next meeting on March 3.
The New Zealand Dollar showed limited gains on Wednesday despite increased trader appetite for riskier assets. Traders were focusing on tomorrow’s rate cut announcement by the Reserve Bank of New Zealand. Expectations are for a cut of about 100 basis points.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.