With most of the world focusing on the news about AIG and HSBC, another bearish story slipped through the media cracks. On Sunday European Union leaders rejected the pleas of poorer performing members for financial aid. The proposed aid request was designed to shore up banks on the verge of default and to stabilize the region. Most of all, the European Union blew a chance to show the world that it is indeed unified. By passing on the chance to help struggling members the EU has put itself in a position to collapse. Is it almost time to begin dusting off your old Deutschemarks?
Almost immediately after the EU rejected an aid package, Fitch Ratings cut Hungary's credit rating to negative. The debt rating services are expected to have a field day reducing the credit ratings of Central and Eastern European nations. Banking systems throughout the Euro Zone may fall like dominos as investors sell Euros while pulling their money out of regional banks.
The U.S. Dollar rallied throughout the New York session fueled by the EU development and fresh news regarding U.S. government aid to AIG and the announcement that HSBC will be seeking new money after posting a huge loss. Throughout the day investors sought safety and liquidity. Risk aversion is currently the main theme.
The Euro traded lower as trader appetite for risky assets waned. Economic contraction and the fear of a collapse of the European Union were the driving forces behind the selling pressure. Traders are also pricing in a rate cut of at least 50 basis points by the European Central Bank on March 5.
Put economic news aside and focus on the possible downgrades of several European Union banks. This will be the news that drives the Euro lower. The current selling activity is being generated by investors trying to get their money out of Euro Zone banks and into the safety of the Dollar. Unless the European Union does a complete about face regarding financial aid to the weaker nations, look for the downside pressure to continue.
The British Pound was weaker as the fear of a meltdown in the global financial system drove traders to the U.S. Dollar. News that HSBC posted a big loss is an indication that toxic assets are still having an effect on financial institutions. Last week the U.K. government announced a plan to insure banks against exposure to toxic assets. Based on the selloff in the Pound the last few days, it looks as if investors will be asking for more from the government.
The weakening domestic economy is also putting pressure on the Bank of England to lower rates close to 0% at its next meeting on March 5. With no room to cut after this meeting, look for the U.K. government and the BoE to become more creative in their fight to prevent a collapse of the U.K. banking system.
The Japanese Yen traded firm most of the day. Technically oversold conditions may be the cause of the rally. With Japan's economy on the brink of a meltdown, it would be hard to believe that investors would be willing to invest their money in the Yen for protection. Then again, the U.S. financial system may be so weak that traders may be beginning to think that the Yen is a safer bet at this time.
The Swiss Franc is traded lower overnight and into the New York trading session. Banking problems are weakening the Swiss economy. Now that the European Union has rejected aid to the weaker member nations, the Swiss banking system is facing exposure to loan defaults from Central and Eastern European banks.
This currency has not been the same since the U.S. intensified its probe of tax cheats using the Swiss banking secrecy laws to hide assets. Fear of an intervention by the Swiss National Bank is also encouraging selling.
Evidence that the weakness in the global economy is spreading to the Canadian economy is mounting. Last week retail sales were reported worse than expected. Today it was reported that fourth quarter GDP declined at an annual pace of 3.4%.
The recessions in the U.S. and Europe are reducing demand for Canadian exports such as crude oil, natural gas and lumber. Now that the global recession has spread to the domestic economy, the Canadian banking system may start to feel exposure to loan defaults. So far the banking system has been immune to most of the toxic asset problems sweeping the global banking systems. Do not be surprised if a few of the Canadian banks start to show cracks.
The AUD USD is expected to continue to feel downside pressure as long as traders are averse to risk from higher yielding assets. The Australian economy is also exposed to the weakening economies throughout Southeast Asia. Less demand from Japan for Aussie goods is a main concern. Look for the Reserve Bank of Australia to cut rates dramatically in an effort to revive the economy and stimulate growth on March 3.
Falling commodity and stock prices are expected to keep the downside pressure on the New Zealand Dollar. As weakness continues to spread throughout the economy do not be surprised if the Reserve Bank of New Zealand makes an emergency rate cut along with Australia instead of waiting for its next meeting on March 12. Something has to be done to jump-start the economy although the economy will not actually start to improve until there is foreign demand for New Zealand goods.
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