The Euro continued to suffer from downside pressure on Monday as traders increased their bets that the European Central Bank would cut interest rates by as much as 75 basis points on January 15.
Pressure from a stronger Dollar along with the threat that the S&P Corp. would cut European Union member Spain's debt rating weighed on the market throughout the day. Traders know the ECB is under pressure to cut and are pressuring the market in anticipation of this taking place in a few days. The ECB has only cut half as much as the U.S. Federal Reserve and is considerably behind the rest of the central banks.
There is some talk circulating that the ECB will propose an economic stimulus plan to go along with the rate cut, but investors feel that this plan will be too late and not enough. Furthermore, any stimulus plan announced tomorrow will take too long to take effect. Continue to look for more downside pressure.
The British Pound enjoyed a nice short-term rally last week because of the small 50 basis point rate cut, but this week short-traders came back with a vengeance. U.K. credit and housing markets continue to weaken an already deteriorated economy. Since lowering interest rates is not working to revive the economy, look for the Bank of England to try to reignite the economy with a more aggressive stimulus plan.
Traders continued to dump the Swiss Franc in favor of the U.S. Dollar. Swiss investors had been repatriating Francs for several weeks in an effort to get a better return. At this time, however, investors are not being greedy and are instead looking for a return of capital rather than a return on capital. This is why they are favoring the lower-yielding U.S. Dollar at this time.
The USD JPY continued its break on Monday as trader appetite for higher yielding assets fell and investors sought the safety of the lower yielding Yen. The sharp break in equities sent traders scrambling to the long side of the Yen as it became clear that they wanted no part of the more risky assets. Trader optimism in a stock market bottom is waning. The more the equities break, the higher the Japanese Yen should rally.
There is now solid evidence that the U.S. recession has spread up north to Canada. On Monday the Bank of Canada announced that lending conditions are tightening and overall business sentiment is going down. These two reports should pressure the BoC to aggressively cut interest rates at its next meeting on January 20. Furthermore, general weakness in commodities led by a sharp break in crude oil should continue to put pressure on Canadian exports, thus doing more damage to the economy. Look for traders to rally the USD CAD in anticipation of a BoC rate cut next week.
Australian Dollars fell on Monday as the break in global equity markets signaled lower demand for higher-yielding, higher-risk assets. Sharply lower crude oil and other commodities is putting pressure on Australian exports. This price action is leading to more selling pressure on speculation that the Reserve Bank of Australia will have to cut interest rates again at its next meeting on February 3. If this market gets too volatile, then look for a possible intervention by the RBA.
The NZD USD traded weaker on Monday. Lower commodity markets are hurting the export business and consequently the NZ economy. Investors are also shying away from higher-risk, higher-yielding assets. The lowering of the debt rating from stable to negative by the S&P Corp. encouraged investors to bailout of the New Zealand Dollar. Look for more downside pressure as traders anticipate another rate cut by the Reserve Bank of New Zealand on January 29. Look to sell rallies if given the opportunity as this pair is setting up for a break.
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