The Euro was met with more selling pressure on Tuesday as traders reacted to the narrowing of the U.S. trade deficit and perceptions that the European Central Bank is not doing enough to combat the rapidly worsening Euro Zone recession.
The Euro is getting attacked from all sides at this time. A threat by the S&P Corp. to slash the debt credit ratings of Spain is just another sign that the situation among Euro Zone countries is deteriorating fast. Investors are pressing the European Central Bank to take more swift and definitive action to revive the economy. Traders are leaning on Trichet to put his ego aside and lean on interest rates as aggressively as have the U.S. Federal Reserve and the Bank of England.
The Euro Zone economy is not looking good at this time prompting traders to call for a 50 to 75 basis point cut at the ECB's next meeting on January 15. Talk is circulating that the ECB may propose a new economic stimulus plan. This may be a case of too little, too late. In addition, it would probably take too long to implement. It is clear that global investors are demanding action now.
The British Pound continued to feel downside pressure as it finished the day at a new low for the year and slightly above last year's low. Home sales and retail sales reports indicated today that the U.K. economy is fragile and poised to deteriorate further. Studies show that British corporations will be exposed to more dire situations in the near future if something is not done to revive the economy. The Bank of England cut rates last week by an expected 50 basis points. Investors are now calling on the BoE to take more aggressive action. Like the ECB, the BoE may introduce a new stimulus plan, but it has to be enough to work quickly to stop the economic bleeding.
The USD CHF moved higher on Tuesday as traders continued to dump Swiss Francs in favor of the safe-haven U.S. Dollar. The Swiss economy, which is already in a recession, could suffer a further decline as both the Euro Zone and Eastern European countries continue to weaken. The Swiss National Bank does not meet until March 12, but a further slowdown in the economy may prompt it to cut interest rates sooner.
The Japanese Yen continued to move higher on Tuesday as traders sought the safety and security of the U.S. Dollar. Another selloff in the equity and commodity markets prompted traders to shun higher-yielding, higher-risk investments. The higher the Yen moves the more damage it inflicts on Japanese exports and corporate earnings. This is encouraging some Japanese officials to call on the Bank of Japan to intervene at this time. Volatility could pick up in the Yen if the BoJ begins an aggressive selling program.
The Canadian economy was hit with more bad news on Tuesday as a report showed Canada's trade surplus had narrowed more than expected. Lower commodity prices led a by weakening energy complex helped drive the trade surplus to its lowest level in 11 years. Combined with yesterday’s reports showing tightening credit and falling business sentiment, the Canadian recession is poised to deepen. Based on this series of poor economic reports, look for the Bank of Canada to take more aggressive action at its next meeting on January 20 and slash rates by at least 50 basis points.
The AUD USD continued to erode because of falling commodity prices and a slowdown in investor demand for higher yielding assets. Sharply lower crude oil prices are leading to a drop in Australian exports. The continuing deterioration of the export market is pulling the Aussie economy lower. This will probably lead to another round of interest rate cuts by the Reserve Bank of Australia. The last time the Australia economy faced a similar situation, the RBA intervened. This time the selling pressure may be too great to overcome with an intervention.
Downside pressure continued to mount on the New Zealand economy following the S&P Corp. reduction of its credit rating from stable to negative. Falling commodity prices are hurting exports. Investor demand for higher yielding New Zealand assets are waning as they seek the safety and security of lower yielding assets. With the global economy continuing to deteriorate and commodity prices falling, look for more downside pressure on the NZD USD.
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