Oversold markets and fresh news regarding possible aid to struggling European nations helped put pressure on the U.S. Dollar on Thursday. Most of the major Dollar-denominated Forex pairs have been under pressure since Treasury Secretary Geithner announced his ill-fated banking rescue plan last week as traders have flocked to the safety of the Dollar.
The foreign currency markets began to turn around late Wednesday night when global equity markets rallied, helping trader appetite for more risky assets increase. Additional support was provided when Germany announced the possibility of a providing much needed financial aid to struggling European nations.
Several weeks ago master trader George Soros said the Euro may not survive unless the European Union's more wealthy nations started to share some of their assets with the much poorer nations. He also warned that it was necessary for the European Central Bank to start addressing the issue of bad loans and to try to work with other central banks to develop a global solution to the toxic asset crisis.
Nothing was done at the time of the warning until this week following the announcement of the possible downgrade by Moody's Investor Services and the S&P Corp. of Euro Zone banks doing business with Eastern and Central European nations. The rapidly deteriorating economies throughout Europe have prompted talk of the possibility of loan defaults spreading across Europe. This led the two rating agencies to warn of the danger of exposure to these economies.
The rapid decrease in the financial structure of Eastern and Central European economies has prompted Germany to propose aid to these ailing nations. Although no formal details were released, traders felt that it was necessary to cover short positions in hopes the expanded details to be released at a later date will be enough to prevent a breakdown in the Euro Zone banking system.
News that the Goldman Sachs Group felt that the Eastern and Central European banking issues were already priced into the Euro also helped stabilize the EUR USD
The British Pound gained ground on Thursday after Germany announced a plan to help out struggling Eastern and Central European nations. The news helped rally global equity markets overnight and increased trader appetite for more risky assets. Despite an equity market sell-off late in the session, the Pound was able to hold on to most of its earlier gains.
The announcement of plans by the Bank of England to buy commercial assets also provided a boost to the GBP USD. Traders bought the Pound as confidence in the BoE's attempts to restore the ailing U.K. economy was renewed after several days of selling pressure. Many traders are supporting the actions by the Bank of England because of its proactive nature. Speculators seem to like it when central banks take an active approach to aggressively fight the growing economic slowdown.
Look for more action from the Bank of England to jump start the economy. Cheap U.K. assets may also encourage fresh foreign investor buying. Gains may be limited in the short-run, however, due to the worsening U.K. housing slump and on speculation that the BoE will cut interest rates to between 50 and 25 basis points on March 5.
Economic woes continued to plague the Japanese economy. The Japanese Yen lost more ground today as technical breakouts to the upside triggered heavy buy stops. The rally in the USD JPY on Thursday was being fueled by the Bank of Japan's asset buying.
With interest rates left at 0.10%, the BoJ's only choice to lighten up the value of the Yen is to provide monetary policy stimulus. This means pumping cash into the system through the purchase of assets. On Thursday the Bank of Japan was reportedly buying commercial paper.
The Japanese economy is expected to continue to weaken as exports deteriorate. Global economic weakness led by lower demand from consumers is hurting demand for Japanese exports. Look for the USD JPY to continue to rally as long as the Japanese economy remains weak and consumer demand for Japanese goods drops lower.
The USD CAD closed higher on Thursday despite the strong gain in crude oil. The failure of the Canadian Dollar to rally when one of its major exports traded sharply higher is an indication that traders are more concerned about the stock market’s performance at this time.
Early in Thursday's trading session, the Canadian Dollar was up as trader appetite for risk increased following Germany's announcement of a plan to help more needy European nations. This rally quickly fizzled as the stock market could not hold on to gains. Sellers pounded on the Canadian Dollar as the stock indices dropped to news lows for the week.
Global growth is still a major concern for the Canadian economy since Canada is an export oriented economy. As long as demand is down for commodities look for the USD CAD to rally.
Speculators are starting to watch key Canadian exports such as crude oil, copper and aluminum for clues as to whether demand for industrial metals is increasing. Higher prices in these three markets may mean a short-term bottom has been formed. An increase in demand for these markets may also mean the fear of inflation is becoming an issue.
The Swiss Franc is expected to continue to show weakness as speculators are betting that the Swiss government will follow-through on its plan to revive the economy by purchasing assets.
With interest rates already at extremely low levels, the Swiss National Bank has no choice but to try to revive the economy through the purchase of government bonds or other investments in an effort to lower the price of the Swiss Franc. A lower Swiss Franc will likely trigger a boost in exports but the plan may take some time to work.
Traders supported the Australian Dollar on Thursday. Most of the buying came from speculators who believed this market was oversold and that downside losses would be limited because of the old bottom.
Additional buying came from speculators who believed that the action by Germany to support poorer European nations would be beneficial to the Australian economy. A successful rescue plan by the Germans may revive demand for commodities which would then trigger a boost to the Australian economy.
Short-term the AUD USD remains under pressure, but longer-term the effects of the recent series of interest rate cuts combined with the new financial stimulus plan may trigger growth in the economy.
The NZD USD rallied on Thursday and held on to gains as fresh buying came in to defend this currency pair from making a new low for the year. The early strength in the stock markets helped boost demand for riskier assets and the strong gain in crude oil helped to sustain these gains throughout the New York trading session.
News that Germany may provide aid to struggling Eastern and Central European nations also helped fuel hope that demand for commodities would increase if these nations were allowed to function properly. Tight credit conditions are making it difficult for struggling nations to obtain the funding for major commodity purchases. Bullish NZD USD traders are hoping that Germany provides enough aid to trigger renewed demand for New Zealand exports.
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.