For much of the day the greenback was trading firm buoyed by continuous buying backed by the notion that the new U.S. financial stimulus package and the U.S. banking rescue plan would fall short of market expectations. Throughout the day rumors had persisted that the government was planning some sort of mortgage bailout plan. Traders for the most part ignored the rumors, having been burned earlier this week by bidding up foreign markets in anticipation of a solid banking rescue plan. Treasury Secretary Geithner burned speculators by presenting a less than stellar performance in his bid to gain global support for his plan to save the banking industry.
Speculators remained comfortable in their long U.S. Dollar positions until it was reported late in the trading session that the U.S. did indeed have a banking rescue plan that was clear and specific. This news brought immediate optimism to the stock market and triggered a magnificent rally into the close. The new plan which reportedly specifically spells out that government money will subsidize mortgages fueled a decline that gave back much of today's gains in the Dollar and had some currency pairs closing near their high for the day.
There is no doubt that traders will be digging tonight for more information on the U.S. government's new proposal to help the ailing banking industry and homeowners. My guess is that given the dismal performance and low credibility of Geithner, President Obama will attempt to use his charm and charisma to convince the American people of the viability of the new plan. The question is: when will more details of this proposal become public? It is doubtful that it will be released tomorrow because if it fails again to generate acceptance, the stock market will plummet once again ahead of a long week-end. It probably will not be Monday either because it is a market holiday. My guess is that sometime Tuesday Obama will take the time to present this new banking rescue plan to the world.
In the meantime, there may be some light profit-taking in the Dollar as traders may not want to be exposed to too much bearish activity over the long holiday week-end.
Pressure remained on the Euro for most of the day as the Dollar strengthened on less demand for higher yielding assets. Fear that the global recession is deepening has led traders to buy the safe-haven Dollar for several days.
Tomorrow the Euro Zone and German GDP figures will be released. Both are expected to show severe declines. Germany is expected to show a big decline on a huge loss in exports. As other countries’ economies deteriorate, few German goods are being demanded. News that the Euro Zone GDP will decline will lead to speculation that the European Central Bank may have to cut rates extensively at its next meeting in March.
The pressure may be on the ECB as many investors feel that the ECB has been behind the curve when it comes to economic stimulus plans and aggressive interest rate cuts.
Look for bearish news from the ECB to dominate the market tomorrow, but be aware that any announcement from the U.S. regarding more concrete details of its banking rescue plan may limit losses or even trigger a short-covering rally.
The British Pound remained under pressure throughout the day on Thursday. Traders are still selling the GBP USD in anticipation of aggressive monetary policy action by the Bank of England. Rumors are circulating that the BoE is going to start buying assets in an effort to revive the sinking economy.
Most of the pressure on the Pound this week is because of the forecast of lower growth in 2009. Bank of England Governor Mervyn King even went as far as saying the U.K. was in a deep recession. Rumors were circulating at times on Thursday that the BoE is even considering an interest rate cut to below 1%. This hurt the Pound even more as speculators believe this drastic measure would weaken the Cable considerably while at the same time having a minimal effect on the economy.
Traders continued to buy the Japanese Yen overnight and into the New York session as downside pressure mounted in the equity markets. Losses continued to grow in the stock market throughout the day on speculation that the Obama stimulus plan and the new banking rescue plan would fail to live up to expectations. Pessimistic traders bought Yen to pay back loans used to finance investments in higher yielding assets.
Late in the session a massive short-covering rally in the equity markets fueled by speculation of a government backed bailout plan for ailing banks and delinquent mortgage holders helped pare gains in the Japanese Yen.
Traders will be watching tomorrow to see if more details of the banking rescue plan will be released. A continuation of the late session rally in the equity markets overnight and tomorrow will contribute more upside pressure to the USD JPY. Overall it can be said with confidence that the direction of the stock market will dictate the trade in the Yen.
Canadian Dollar traders are beginning to believe that the lack of demand for commodity-linked currencies will continue to push the USD CAD higher. Weakness in exports of raw materials such as industrial metals is a contributing factor to the weakness in the Canadian economy. Most of the downside pressure is coming from the downward spiraling crude oil market. Without another production cut by OPEC some see front-month crude oil under $30 per barrel by the middle of next week.
For several days the USD CAD has been trading mixed out of optimism that Obama's new financial stimulus plan would generate demand for industrial metals. Once the plan was picked apart by critics, it was revealed that the plan is tremendously back-loaded which means the demand for commodities may not pick up until next year or beyond.
Without demand for raw materials and crude oil in the short-run, lower exports will be a continuous drag on the Canadian economy.
The USD CHF rallied sharply higher on Thursday ending days of speculation that technically this market was poised to decline. Early weakness in the stock market led to a flight to quality rally in the U.S. Dollar as traders sold the Swiss Franc.
Fear that another rise in the Swiss Franc would give the Swiss National Bank a reason to intervene also helped to accelerate the rally in the USD CHF. Talk is circulating that the SNB may try to push down the value of the Swiss Franc through monetary policy actions since interest rates are already at 1%. Negative news is beginning to pile up on the Swiss Franc including possible exposure by Swiss banks to the growing financial crisis in Russia.
The Australian Dollar fell again on Thursday as weaker commodity prices kept pressure on the Aussie and all other commodity backed currencies. The falling stock market also contributed to the decline as traders ran away from higher risk assets. News that the newly proposed stimulus plan has met with opposition also attracted selling pressure. Unless new speculator optimism emerges buoyed by greater appetite for risk, look for more downside pressure on the AUD USD.
Risk aversion is helping to keep downside pressure on the New Zealand Dollar. This is not just speculation as traders truly believe that lower commodity prices will drive the New Zealand economy into a deeper, wider recession. The lack of demand for any higher-risk, higher-yielding asset is also contributing to the weakness in this currency pair.
Speculators are already anticipating more downside pressure as the Reserve Bank of New Zealand ponders another rate cut. Falling stock and commodity prices are likely to help maintain the bearish tone in this market. A short-covering rally in U.S. equities triggered by the proposal of a new U.S banking rescue plan may spur a short-covering rally in the grossly oversold NZD USD.
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