The dominant story affecting the Forex markets at this time is the global banking crisis. Traders are carefully monitoring possible bank bailouts in both the United States and the United Kingdom. In the U.S. the concern is that the new administration has yet to present a financial market stimulus or bailout plan. Treasury Secretary Geithner did state at his Senate hearing that he expects a plan in about two weeks. In the meantime the U.S. financial system is in a position to deteriorate further. In the past few weeks the government has released the last of the TARP money, sent billions of dollars to Bank of America and Citigroup, and proposed creating a toxic asset fund. The only things Bank of America and Citigroup have changed are personnel.
The financial situation in the U.K. is very similar to the U.S. situation. The economy has deteriorated to a point where analysts are now betting that the country will lose its AAA debt rating. Earlier this week both the British government and the Bank of England made aggressive moves to save the banking system. The government provided bailout money while the BoE was given permission to flood the market with billions of Pounds. Investors are having a negative reaction to the government’s proposal of nationalizing high risk banks. Traders will continue to put pressure on the Pound as long as they remain in the dark over the government's position regarding nationalization.
In another developing story, Treasury Secretary Geithner issued a statement to the Senate Finance Committee which said that the new administration believes that China is manipulating the Yuan. This was not just a personal opinion but rather a conclusion derived after listening to the input of a number of currency experts. While the U.S. is looking for the Yuan to appreciate at a faster rate, the Bush administration always stopped short of accusing the Chinese of unfairly controlling its currency. Geithner’s remark on China's exchange rate policy may be a sign that the U.S. is going to take a tougher stance. Whether China takes action because of the comments is the question. The U.S. has to be careful in handling this situation since China is now the world’s largest buyer of U.S. debt. Interest rates could sky-rocket in the U.S. if China even cuts back slightly on its purchases.
Trading was flat in the EUR USD following Wednesday's reversal to the upside on the daily chart. Thursday’s inside move indicates impending volatility. The charts indicate a breakout to the upside through 1.3085. This move will not change the trend to up, but will indicate that the bottom at 1.2825 is important. Fundamentally, the Euro Zone economic news has been bearish, but the action over the past two days indicates that perhaps the European Central Bank is going to announce a stimulus plan.
News that the U.K. economy shrank in the fourth quarter helped keep a lid on any gains in the British Pound on Thursday. Buyers may have also shied away from the long side after an analyst stated that the U.K. may have its credit rating reduced from AAA. The inside trading day is indicating impending volatility. The chart pattern suggests a breakout over 1.4026 is likely to trigger a short-covering rally but not a change in trend.
Pressure has been on the GBP USD all week since the government got involved in the bank bailout business and the Bank of England flooded the economy with billions of Pounds. Investors are confused as to whether the U.K. government will begin to nationalize risky banks. The low for the week was put in on Wednesday after the G-7 nations agreed to look into the British financial crisis. A short-covering rally could start from current levels if the government clarifies its stance on bank nationalization.
Volatility slowed down considerably in the USD JPY on Thursday following Wednesday's active trade. The threat of Bank of Japan intervention may have prevented the market from dropping further. The weakness in the equity markets drew traders back to the Yen for safety purposes at times during the day. It is pretty clear that the BoJ is getting nervous about the rise in the Yen. Its choice is to intervene and flood the market with Yen or wait for trader appetite for risk to increase. Each rise in the Yen hurts Japanese exports. With the Japanese economy in such bad shape it looks as if the BoJ has drawn a line in the sand. The charts indicate that this line may be at 87.09.
Currently the USD JPY chart pattern is suggesting a possible double-bottom formation at 87.09 to 87.10. In my opinion if this area is violated to the downside then expect some action from the Bank of Japan. The charts indicate a trade through 91.29 will turn the short-term trend to up, but a move through 94.63 will confirm the double-bottom. Watch for consolidation in the USD JPY between 91.29 and 87.00 over the near-term. If this pattern takes place then start watching for a break-out.
Upside pressure continued in the USD CHF on Thursday as the market is still anticipating an intervention by the Swiss National Bank. Fearing deflation in the near future, the SNB announced earlier in the week that it is poised to take action to slash the value of the Swiss Franc. Like the rest of the world, the Swiss economy is contracting. The Swiss banking industry is helping to drag the economy down. Credit remains tight and weakness in the Euro Zone, Eastern Europe and Russia is slowing down demand for Swiss products.
Fundamentally, the strength in the crude oil market is helping to improve the Canadian economy. Technically, Wednesday's reversal top was confirmed. The top occurred pretty close to a major resistance zone at 1.2981 to 1.3015. The chart pattern suggests more downside action is likely with 1.2262 to 1.2143 the next downside target. Continued strength in commodity prices -especially crude oil- is needed to scare weak longs out of the market.
The Australian Dollar traded flat on Thursday. Traders took their clues from the equity markets which traded in a choppy manner. Downside pressure is on the Aussie as traders anticipate a rate cut on February 3. A strong rally in the equity markets will increase trader demand for risk and provide support for a rally.
The NZD USD remains in a weak position. Traders are pushing the downside in anticipation of an interest rate cut on January 29. Financial traders are looking for as much as 100 basis points. Lower exports are dragging down the economy at this time. The threat of another debt rating reduction by the S and P Corp. is also weighing on investor’s minds. Traders can try to press this market or wait for a short-covering rally to sell.
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