The U.S. Dollar soared on Tuesday as investors showed their disappointment in the U.S. Treasury plan to shore up the struggling U.S. banking system. This highly anticipated report was supposed to inject optimism in the financial markets in the short run while establishing the base for a longer-term economic revival.
Investors were instead handed much of the same lines and clichés from the last administration's attempt to bailout the financial system. The speech by U.S. Treasury Secretary Geithner failed to inspire investors who instead chose to run to safer assets such as gold, bonds and the U.S. Dollar. Geithner at times spoke as if the plan was incomplete. He talked about some great ideas but failed to instill any confidence in the global investing community that any of his ideas were doable. At times it felt like I was listening to a college student trying to defend his position in a paper he had just written. The Obama administration’s whole concept about what has to be done to address the toxic debt and loosen credit lacked substance.
While it is widely understood that the key point of the toxic asset bank is to eliminate bad assets from the books of banks, Geithner failed to gain the confidence of investors when he suggested that the government form a partnership between the private and public sectors. The market knew coming into today that this idea would be on the table and were looking for more solid evidence as to how the bank would come together and who would pay for it. Furthermore, he offered no concrete clues as to how this partnership would value the toxic assets since the free market is still having trouble with this.
In my opinion, Geithner's reign as Treasury Secretary will be a short one. He misstepped with his own income taxes which was forgiven with his Senate confirmation, his comments about China manipulating the Yuan caused him to get chastised at Davos and now his failure to deliver a viable plan to bailout the U.S. financial system after having weeks to prepare indicates to me that he is in way over his head. The global community spoke in a big way today by selling off the stock market and buying Dollars, gold and treasuries. The market is saying that unless there is a workable bailout plan, the worst is yet to come.
Support for a higher Euro crumbled just one day after it looked as if the trend on the daily chart was ready to surge to the upside. Traders instead sought the safety and security of the U.S. Dollar.
Concerns over the Russian economy also led to selling pressure in the Euro. The Russian government is said to be trying to shore up the value of the Ruble by encouraging the selling of Euros by its banks. This situation should be watched closely to see if the financial crisis deepens and if more Euro selling will be encouraged.
The market is also watching to see if Russian loans from Western banks can be renegotiated. If talks break down, there is always the threat of widespread defaults. Furthermore, financial problems in Russia can easily spread to other Eastern European nations that do business with Western European banks.
Heavy selling pressure hit the GBP USD on Tuesday as traders took profits after a week-long rally. Demand for riskier assets dropped throughout the day as U.S. Treasury Secretary Geithner failed to inspire investors with his plan to stimulate the ailing U.S. financial system.
News that the U.K. New Home Sales report was worse than expected may have contributed to the decline. The weakness in the housing sector was a disappointment to many traders who were beginning to believe the Bank of England and the U.K. government are on the right path toward shoring up the economy through timely interest rate cuts and financial stimulus plans.
This report was a setback and may be an indication that tomorrow's highly anticipated inflation report may show a decline rather than the increase that many speculators were betting on. Speculators were hoping a rise in the inflation rate would indicate that the Bank of England would be able to slow down its rate of interest rate cuts.
The Japanese Yen continued to retrace last week's losses as the demand for higher-risk, higher-yielding assets dropped following a disappointing announcement regarding the U.S. government’s plan to shore up its ailing banking system.
Bullish traders were disappointed by the lack of clarity in the banking plan. This led to uncertainty and a renewed lack of confidence that the U.S. government would be able to figure out a way to improve the banking system's bottom line. Japanese investors become nervous about holding on to riskier assets and instead chose to repatriate some of their funds. Continue to look for more Yen buying tomorrow if the weakness in the stock market continues.
The higher gold market could not inspire a rally in the Canadian Dollar as traders instead decided to focus on the USD CAD as a safe haven investment. Although a higher gold market may drag up other commodities, the stronger U.S. Dollar is likely to keep down demand for commodities linked to the Canadian economy.
The uncertainty surrounding Obama's stimulus plan along with the disappointing banking rescue plan caused traders to rethink their positions regarding a long-drawn out U.S. recession. As traders mulled over how far and deep the recession would grow, crude oil traders sold off the crude oil futures contract as perceptions grew that demand for fuel would not increase over the short-run. The break in crude oil also helped accelerate the USD CAD to the upside as crude is a major component of the Canadian economy.
The lack of confidence in the global economy's ability to dig out of the growing worldwide recession may lead traders to sell the Swiss Franc and buy the safe-haven U.S. Dollar. Traders may express their concerns about the global recession spreading by buying the USD CHF aggressively as confidence in Obama's ability to ignite the U.S. economy and banking system disintegrates. The imminent threat of an intervention by the Swiss National Bank may also be a factor keeping downside pressure on the Swiss Franc.
Traders bought the Swiss Franc on Tuesday despite a stronger Dollar elsewhere. The buying spree may have been triggered by UBS which announced a record loss but told investors the worst may be behind then quoted figures showing marked improvement in January. This rally may only be one-day short-covering as the worsening global economic situation is likely to trump the small gains by UBS.
Swiss banking exposure to the ailing Russia economy should be watched carefully. As the Russian economy weakens further, the chance of defaults against loans made by Swiss banks also increases. News that Russia may be encouraging the selling of foreign reserves may also lead to weakness in the currency.
Trader aversion to risk helped trigger a selloff of the Australian Dollar. For days traders have been bidding up the Aussie in anticipation of the passage of Obama's financial stimulus plan and the unveiling of the U.S. plan to shore up ailing banks. Instead investors were disappointed by the impact Obama's plan will have on the economy in the short-run and the lack of clarity and conviction of the U.S. banking system rescue plan.
Thoughts that the recession would further deepen and last longer are leading some traders to believe that a recovery in the commodity markets will be impossible this year. Lower commodity prices would have a negative impact on Australian exports and be a drag on the economy.
Disappointment in the ability of Obama's stimulus plan to generate demand for commodities in the short-run led to selling pressure on the New Zealand Dollar on Tuesday. Trader aversion to risk also increased when the new administration’s banking rescue plan failed to garner the support of the global economic community.
Traders had been anticipating a robust plan that would drastically increase demand for industrial metals. Instead traders have been presented with a plan which may take months or years to have a positive effect on the U.S. economy. Investors also wanted to see that the U.S. government was taking positive steps toward eliminating toxic debt from the balance sheets of its major banks. When both plans failed to ignite confidence and optimism, the stock markets sold off, sending a message that traders no longer wanted to take on additional risk and instead wanted the safety of the U.S. Dollar. This led to fresh selling of the NZD USD.
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