One positive to come out of last weekend's G-20 summit was a promise to provide funding for emerging markets. This announcement could not have come sooner as financial conditions in emerging market nations - especially in Central and Eastern Europe- are expected to worsen.
For weeks there has been talk of Central and Eastern European bank collapses because of exposure to toxic loans. Bank rating services have even threatened to lower the credit ratings of many of these banks. This action would have spilled over to Euro Zone and Swiss banks and would have created a dire situation.
Several weeks ago the very survival of the European Union was being questioned. Many observers felt that it was necessary for the rich EU countries to begin sharing the wealth with the poorer nations. After a weekend of debate, the European Union announced that they were not going to provide aid to the ailing member nations. This put immediate pressure on the Euro and contributed to the recent break.
Many EU members - most likely guided by Germany - thought that the Central and Eastern European nations brought the problems on themselves by trying to Westernize too quickly. This is the main reason why the EU voted against providing aid.
Over the weekend the G-20 nations promised aid to the struggling emerging market nations. Although no details of the plan were revealed, traders bought the Euro today in anticipation of much of the aid going to Central and Eastern European countries. New funding would be a positive to the Euro Zone because it would reduce risk and exposure to the bad banks doing business with the Euro Zone nations. This news is a positive for the Euro, but should be monitored until actual money changes hands.
On Monday, the U.S. Dollar lost ground to many of the majors as trader appetite increased for higher risk, higher yielding assets. Additional pressure hit the Dollar when it was announced that foreigners sold a record net $148.9 billion of U.S. securities in January. This story reminded investors of last week€™s comments by China when it questioned the safety of its investments in the U.S.
Besides questions about the U.S's ability to fund its current account deficit, the Dollar saw more selling after the release of the New York Fed Manufacturing Index. This report hit a record low in March. More weakness was seen after another report showed U.S industrial production was down Both of these reports were not good for the U.S. manufacturing sector and indicated the U.S. has a long way to an economic recovery.
The Euro rallied on Monday as a break through $1.30 triggered a strong short-covering rally. This put the market at a five-week high but failed to attract any follow-through buying. The strong rally was triggered by a combination of the promise of aid to struggling Central and European nations by the G-20 nations and an uptick in the Euro Zone inflation number.
Aid to struggling Eastern and Central European banks is seen as a positive for the Euro because it reduces Euro Zone bank exposure to toxic banks in Eastern and Central Europe. Speculators bought the Euro on this news but the rally may die if a detailed plan is not announced soon.
The small gain in Euro Zone inflation came as a surprise. Traders had to cover short positions initiated by the possibility of an aggressive interest rate cut by the European Central Bank at its next meeting in April. The higher inflation figures may mean the ECB will not cut as much or at all.
The British Pound posted a firm gain because of the weaker U.S. Dollar. Speculators also feel that the aggressive action by the Bank of England last week will put the U.K. economy in a position to recover more quickly from its current recession. Last week the BoE used quantitative easing to buy government gilts. This provided liquidity to the market which is supposed to stimulate the economy.
Weakness in the U.S. manufacturing sector also led to weakness in the U.S. Dollar versus the British Pound. Finally, strong gains in the U.S. equity market early in the trading session led traders to seek more risky, higher yielding assets like the British Pound.
The USD JPY was up on Monday. The weak Japanese economy is still a major issue. The G-20 meeting did nothing to help to the Japanese economy. Continue to look for the economy to deteriorate until demand for exports picks up from the U.S. and China.
Talk is circulating that the Bank of Japan is considering quantitative easing or an intervention to help break the Japanese Yen. It is believed that a cheaper Yen will attract more demand for Japanese goods.
The quantitative easing is expected to come in the form of the purchase of long-dated bonds and perhaps bank subordinated debt. This should provide liquidity to an economy which is cash-strapped.
The most impact on the Yen will come from an intervention. Last week the Swiss National Bank intervened and drove the Swiss Franc sharply lower. This came as a surprise because the Swiss economy is in much better shape than the Japanese economy. Do not be surprised if the Bank of Japan simultaneously applies quantitative easing and intervention at the same time after its meeting on March 17.
The USD CHF traded mixed as traders are still recovering from last week's interest rate cut and intervention by the Swiss National Bank. Of course it is too early to tell if the actions have had any impact on the Swiss economy.
Traders will be watching for the possibility of another round of intervention or quantitative easing since the SNB seems committed to weakening its currency. Since the SNB wants to see a lower Swiss Franc it is best to trade the USD CHF from the long side. Look for opportunities on dips.
The Canadian Dollar posted a gain against the U.S. Dollar on Monday. The gain was mostly attributed to strong rallies in the stock and commodity markets. An early stock market rally fizzled late in the trading session as traders took profits ahead of tomorrow's FOMC meeting. The Canadian Dollar was able to hold on to its gains because of strength in crude oil and grains.
There is a lot of selling pressure coming into the USD CAD at or near $1.30. This price apparently is the line in the sand. If this price ever goes bid, look out to the upside. As it currently stands, however, the USD CAD is making a short-term top based on last week's reversal down and follow-through break today. This pattern usually suggests a 2-3 week decline.
The keys to sustaining a rally in the Canadian Dollar are strong equity and commodity markets. Traders feel that the economy will recover when the rest of the world recovers. Based on the structure of the Canadian economy and its reliance on exports, the government and the Bank of Canada can really do nothing to trigger interest from foreign buyers. The Bank of Canada can propose stimulus plans, but unless China and the U.S. begin to demand Canadian goods, any plan is likely to fail.
The fact that OPEC voted over the weekend to leave crude oil production levels unchanged shouldn't hurt the Canadian economy too much as long as there is compliance with the previous two production cuts. A combination of lower demand and an oil glut will be bearish for the Canadian economy so it is important that at the least the oil supply remains at current levels.
The AUD USD posted a strong gain on Monday but gave back a lot when U.S. equity markets were unable to hold onto earlier gains. The current rally is being driven by increased trader appetite for risk although optimism about the economy is providing some support. Prices can turn down fast if the global equity markets start another leg down.
Traders are optimistic about the Australian economy because the recent stimulus plans seem to be working. Speculators will be watching to see if the Aussie manufacturing sector begins to show some improvement.
If manufacturing shows no improvement or a loss then the Reserve Bank of Australia will have to consider slashing interest rates again. Last month it refrained from cutting, choosing instead to let its recent stimulus plan do its work. Bearish GDP numbers from 4Q made the Reserve Board aware of the fact that the economy is still bad. Traders will be watching the Reserve Bank of Australia's Minutes from its March 3 meeting for direction.
Despite a bearish manufacturing sales report, the New Zealand Dollar was able to post a gain versus the U.S. Dollar. This was most likely triggered by greater demand for higher yielding assets.
It is clear that bullish NZD USD speculators are not watching economic reports at this time and instead are focusing on the global stock markets. This could turn into a bull trap if New Zealand's economy continues to deteriorate and the stock market turns down quickly.
Last week the Reserve Bank of New Zealand cut interest rates to historical levels and hinted that the easing will slow, but this decision could prove to be premature if economic reports continue to come out bearish. The long-term outlook remains bearish for the economy, but be aware that strong short-covering rallies are possible if global stock markets remain firm.
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