The U.S. Dollar fell against most major Forex markets as a stronger stock market increased trader appetite for more risky assets. The Dollar weakened as a safe haven currency as tensions in the banking sector eased. Some traders feel declaring the bull market over in the Dollar is a bit premature as there are no clear, definitive signs that the U.S. financial system is sound yet. Others cite the recent massive rally may have overshot its target in the short-term and became technically overbought.
A report was released before the U.S. trading session which showed a slump in China's exports. This was another indication of just how much the global economy has deteriorated. A drop in China's exports means less foreign exchange capital. Traders are now becoming concerned that a further decline in Chinese exports will mean less foreign capital will be available to buy U.S. debt. This news also put pressure on the Dollar.
With no fresh fundamental news to drive the U.S. Dollar higher, continue to look for weakness.
The Euro traded higher on Wednesday in a follow through rally following strong gains on Tuesday. Despite bearish economic reports, traders feel this market is oversold and prefer to trade the long side. Judging from the trading action, it looks as if the Dollar is weaker rather than the Euro is stronger. Traders are still waiting for more aggressive action by the European Central Bank to combat weakness in the Euro Zone economy before acknowledging a bottom. Traders expect to see another weak Euro Zone industrial report tomorrow. This will be another sign that the ECB will have to cut aggressively next month.
British Pounds traded lower for much of the day in anticipation of the start of a new quantitative easing campaign by the Bank of England. After lowering interest rates to almost zero and providing numerous stimulus plans, the only thing the BoE has left is to print money to provide enough liquidity to revive the economy.
BoE officials were often criticized for their slow response at the beginning of the global credit crisis, but since then they have responded in an aggressive manner. Quantitative easing represents an aggressive action because if it fails the economy will most likely face devastating inflation. The Bank of England however, feels that it is on the right path toward economic recovery.
Despite a weakening economy and the threat of deflation, the Japanese Yen closed higher on Wednesday. Some traders feel that this bad news was already in the market. The rally in the Yen is probably more a reflection of the weaker Dollar rather than the stronger Yen. Look for the short-covering rally to continue if equity markets can continue to rise.
The Swiss Franc closed stronger on Wednesday as the U.S. Dollar lost a little more of its safe haven status on speculation that the financial crisis in the U.S. was easing. The rally was limited by news of another loss by UBS. This news was another example of how much the Swiss banking system has been reduced to shambles. Gains were limited in the Swiss Franc because of selling pressure in anticipation of a 0.25% rate cut by the Swiss National Bank on March 12.
Falling crude oil prices put pressure on the Canadian Dollar on Wednesday. News that China's exports declined is leading to speculation that China will demand less oil in the future. Crude oil makes up a large portion of the Canadian export market. The Asian market is expected to continue to lower its demand for Canadian crude as long as the recession in the region continues to grow.
Greater demand for higher yielding assets is needed to boost the Canadian Dollar. Aggressive counter-trend traders are waiting for higher commodity prices and a stronger stock market.
The firmer stock market supported the strong rally in the Australian Dollar. Higher commodity and stock prices are still needed however, to trigger a change in trend. There is no way to know when exports will pick up, but as long as the recent stimulus plan is allowed to work its way out, traders may start to support a rally in the AUD USD.
The Reserve Bank of New Zealand cut its benchmark interest rate to a historically low 3.0%. This move reflects how bad the economy has become. Despite the rate cut, the NZD USD rallied on the implication that the RBNZ is done easing for the time being. The forecast by the RBNZ of a recovery later in the year also boosted optimism and helped support the rally.
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