As expected, the European Central Bank cut its key benchmark interest rate by 50 basis points to 2.0%. This cut was the minimum forecast by economists and actually was a disappointment to most traders who had expected a 75 basis point cut.
Investors expressed their disappointment with the action by selling off the Euro in the face of another possible banking crisis in the United States. For weeks Euro traders have been trying to convince the ECB to make an aggressive move toward stalling the spreading recession in the Euro Zone. Traders are convinced that the ECB is dragging its feet and that an acceleration of rate cuts is necessary. ECB President Trichet did not help matters when he hinted that the ECB would skip a rate cut in February and focus again in March.
Trichet continues to demand that ECB officials monitor the economy for any positive changes before making any additional cuts. The Euro Zone economy, however, is worsening and the recession spreading. If the ECB is not going to cut rates then traders should keep their eyes out for some sort of creative plan to stimulate the economy. Until the ECB acts more aggressively, look for the EUR USD to continue to weaken.
The British Pound continued to retreat on Thursday as traders once again favored the safety of the U.S. Dollar. Investors have been pressuring the Pound in anticipation of another aggressive interest rate cut by the Bank of England. Although the BoE cut rates just last week, bad economic news is leading traders to push the BoE into a more aggressive interest rate cutting mode. High unemployment, poor retail sales and a stagnant real estate market are the leading reasons why the U.K. economy is poised to experience its worse recession in history.
Since the Bank of England does not meet again until February 5, do not be surprised by the announcement of an economic stimulus plan in the meantime to revive the economy.
The USD CHF continued to strengthen on Thursday as traders once again are seeking the safety of the U.S. Dollar. Weakness in the Euro Zone, Eastern Europe and Russia is putting pressure on the Swiss economy. The recession in those countries is straining the Swiss banking industry. Overnight Russia devalued the Ruble for the fourth time in five days. All of these factors are weakening the Swiss economy and may cause the Swiss National Bank to react with a preemptive interest rate cut before its next official meeting on March 12.
The Japanese Yen gave back some of its weekly gains when the U.S. stock market rallied. This move reversed the market which had been pressing new weekly highs. Trader appetite for risk increased late in the trading session when the U.S. Senate voted to release the last of the TARP money. This brought optimism to the market and triggered a massive reversal in the equity markets. Look for more upside pressure in the USD JPY if the optimism continues tomorrow. Traders had been cautious at current levels because of the threat of an intervention by the Bank of Japan. The BoJ has been getting pressure from the Japanese government because each uptick in the Yen has been costing the Japanese economy exports and driving corporate profits lower.
Lower commodity prices led by crude oil which made a new low for the year helped drive down the Canadian Dollar. This was not good news for the Canadian economy which relies on crude oil and natural gas exports. Traders are already pricing in an interest rate cut by the Bank of Canada at its next meeting on January 20. Reports this week have indicated that the economy is worsening. Credit is tightening, the trade surplus has narrowed and business sentiment is dropping. Look for the USD CAD to continue its march higher as long as the pressure remains on crude oil.
The Australian Dollar traded weaker most of the day driven lower by falling commodity prices and a decline in trader demand for risky assets. Late in the trading session the U.S. Senate announced that it is releasing the last of the available TARP money. This helped calm the equity markets down and triggered a huge short-covering rally. With optimism returning to the market, trader appetite for risk increased. This led to a reversal to the upside in the AUD USD. Despite the short-term euphoria, the Aussie economy still remains in a weak position because of falling exports. This should prompt the Reserve Bank of Australia to cut interest rates at its next meeting on February 3.
Downside pressure continued to push the NZD USD led by weakening commodity prices. New Zealand exports are down and hurting the economy. This news is likely to encourage the Reserve Bank of New Zealand to cut interest rates by as much as 100 basis points on January 29. Late in the trading session trader demand for risk picked up and drove the market higher in a short-covering rally. Although there may be some follow through tomorrow, the overwhelming weakness from the global recession is likely to maintain the downside pressure.
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