The U.S. Dollar weakened against all major currencies except the Japanese Yen on Friday after the U.S. government announced a new aid package for Bank of America. This new bailout plan - which was reportedly for $20 billion - helped to ease investor stress about the condition of the U.S. financial markets. Throughout the week the driving force behind the rally in the U.S. Dollar were thoughts that troubled banks would once again infect the U.S. financial system. Traders aggressively bought U.S. Dollars in pursuit of a low-yielding safe-haven investment four out of five days this week.
The Euro finished the week on a high note as the U.S. government’'s bailout of Bank of America helped increase trader interest in the higher yielding currency. Despite the strong rally on Friday, the EUR USD finished the week lower. Most of the weakness was attributed to the sinking Euro Zone economy and trader perceptions that the situation was going to get worse unless the European Central Bank made a more aggressive effort to trigger a recovery. Traders are convinced that the ECB is not pulling its own weight when it comes to interest rate cuts. The rest of the world is headed toward zero percent while ECB President Trichet is contemplating skipping a rate cut at the next ECB meeting in February.
On January 15, the European Central Bank cut its key benchmark interest rate by 50 basis points to 2.0%. This cut was the minimum expected by most economists and actually disappointed some who had expected a 75 basis point cut. The news actually weakened the Euro as traders thought the ECB should be accelerating its interest rate cuts.
All eyes will be focused on Obama’s inauguration next week. This could bring optimism to the market which could increase trader appetite for risk. This could trigger a strong rally in the EUR USD.
The British Pound finished higher on Friday following the announcement of a U.S. government bailout of another ailing financial institution. This news brought some optimism to the markets and traders stepped up their demand for higher yielding currencies. The rally on Friday should not be viewed as an endorsement of the Pound, but rather the selling of the lower-yielding U.S. Dollar.
The market traded in a wide range for the week with a lower close. Worsening economic conditions in the U.K. continued to put pressure on the Pound all week. Despite a rate cut on January 8, traders believe the Bank of England is going to have to resume a more aggressive interest rate cutting policy in order to stem the rapidly accelerating recession.
High unemployment, poor retail sales and a stagnant real estate market are the leading reasons why the U.K. economy is poised to experience its worse recession in history. The next Bank of England meeting is not until February 5. Between now and then, look for the BoE to announce a new economic stimulus plan. Next week's inauguration may bring some euphoria to the markets. This could trigger greater demand for riskier assets. With the GBP USD trading at extremely low levels, do not be surprised by a short-covering rally.
The USD CHF closed up on Friday, but down for the week. Traders bought the Swiss on Friday as demand for higher yielding assets increased following the $20 billion bailout of Bank of America.
Weakness in the Euro Zone, Eastern Europe and Russia put pressure on the Swiss economy throughout the week. The recession in those countries is putting a strain on the Swiss banking industry. With the Swiss economy expected to deteriorate further along with the Euro Zone, look for aggressive action by the Swiss National Bank to attempt to defend the economy from further weakness. The SNB does not meet until March 12. This gives them plenty of time to make an emergency cut if economic conditions worsen.
The Japanese Yen finished the week higher following a strong closing price reversal on the daily chart on January 15. For most of the week, the USD JPY traded higher as traders became more risk averse and aggressively sought the safety of the lower-yielding Yen. Investors became more optimistic about the equity markets late in the week after Congress released the last third of the TARP money and the U.S. government bailed out the financially strapped Bank of America.
The strong rally in the USD JPY is an indication of a strong start next week. Traders may drive up equity markets in celebration of the inauguration of Obama. This may trigger more selling in the Yen.
The rally in the Yen did not come as a complete surprise. For weeks, investors had been anticipating aggressive action by the Bank of Japan such as an intervention to stem the rapid rise in the market. The Japanese government has been putting pressure on the BoJ to take aggressive action since each rise in the Yen is eroding exports and triggering corporate losses.
The Canadian Dollar closed the week sharply lower led by a weakening energy market. This was not good news for the Canadian economy which relies on crude oil and natural gas exports. Investors are already pricing in an interest rate cut by the Bank of Canada at its next meeting on January 20. Reports this past week indicated that the economy is rapidly deteriorating. Credit markets are tightening, the trade surplus is disappearing and business confidence is falling. Look for the USD CAD to continue its strong uptrend as long as the pressure remains on crude oil. Technically, the market is nearing a major resistance zone so it may take some effort to push this market higher.
The Australian Dollar finished the week lower. Most of the pressure this week came from falling equity markets and commodity prices. The threat of another financial crisis and the weak stock market led to less demand for the higher yielding Aussie. Falling commodity prices led by lower crude oil weakened Australian exports.
Late in the week some optimism returned to the markets following the release of TARP money and the bailout of Bank of America. This led to a strong short-covering rally in the AUD USD on Friday. Despite the possibility of a follow through rally early next week look for the Reserve Bank of Australia to cut interest rates at its next meeting on February 3.
The NZD USD suffered a huge loss for the week. The primary reason for the decline was the downgrading of the New Zealand debt rating by the S&P Corp. Downside pressure on the New Zealand Dollar was also led by weakening commodity prices. Lower raw material prices are weakening exports and hurting the economy. All of the bearish news piling up is likely to force the Reserve Bank of New Zealand to cut interest rates by as much as 100 basis points on January 29.
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