After a series of devaluations of the Ruble, Russia was finally hit with a downgrade of its credit rating. For months Russia has been trying to defend its currency in the face of falling oil prices, declining cash flow and dwindling foreign capital investment. All of its efforts have turned out to be useless as the Ruble continues to decline. The problem is that Russia is not the only victim of the credit downgrade. Western European banks and the Euro Zone economy have been left with exposure to the crumbling Russian economy.

The situation in Russia and Eastern Europe is likely to spread throughout the region because of the inter-locking relationships of the economies. This was evidenced by the devaluation of the Kazakhstan currency on Wednesday. The currencies facing the most exposure are the Euro and the Swiss Franc.

The Euro traded lower on Wednesday on pressure from a downgrade of Russia's credit rating and the devaluation of Kazakhstan's currency. While it may not be evident at this time, the Euro Zone economy is facing great exposure to this grim situation. Not only will demand for Euro Zone goods and services feel the pinch of slow or no demand, Euro Zone banks face the strong possibility of defaults on loans. This may be the exact situation Soros was talking about last week when he warned that the European Union is facing survival issues unless it addresses the issue of toxic loans.

The Euro may begin to feel pressure from two fronts over the near-term. Firstly, Russia is selling Euros to raise cash. This action may put unexpected downside pressure on the Euro. Secondly, although it may not cut interest rates tomorrow, the European Central Bank is now going to have to battle the problems in Russia and Eastern Europe along with the deepening economic slow down in the Euro Zone.

The ECB meets on February 5. At this time it is expected to hold rates at 2% while it re-assess the economy for the March meeting. In the meantime, it has offered no solution on how to deal with the problems in Russia and Eastern Europe. Trading may be light tomorrow as investors stand aside ahead of the rate announcement. Keep an eye out for any comments from the ECB dealing with Russia.

A better than expected U.K. Service Report helped support the British Pound on Wednesday. This is the second friendlier report release over the past week. While they do not signal a turn in the economy, friendly reports are always welcomed because they slow down the decline in the currency by making the bears think twice about aggressively shorting.

Overall the GBP USD remains in a down trend. Excessive bearishness put the market in a grossly oversold position last week before the start of a short-covering rally. Based on the chart pattern, it is going to take a successful test of the low to confirm whether a bottom has been formed. So far we have not seen any attempt to test the low.

On February 5 the Bank of England is expected to join the other major central banks with a rate cut to 1%. At this time it does not look like the market has priced in the full cut. This could lead to selling pressure tomorrow and after the cut is announced. Do not expect too much action on Wednesday as major players are likely to stand aside ahead of the report.

The USD JPY remained in a tight range but over recent bottoms near .8700. Currently the Yen and the Dollar are battling it out for number one safe haven status. A verbal intervention from the Bank of Japan has the market in a holding pattern. Bullish traders are reluctant to get aggressively long at current levels. Bearish traders do not want to get heavily short until it is clear that the demand for higher risk assets is on the rise. The indecision is keeping the Yen in a range.

Earlier in the week the Bank of Japan proposed an economic stimulus plan to help increase cash reserves at Japanese banks. Its proposal included buying listed shares of stock held by Japanese financial firms. The Yen responded positively to the news with a slight rally. This is not the situation the Japanese government wants to see at this time. Weeks ago the government called out the Bank of Japan to do something about the rise in the Yen. The stronger Yen is responsible for falling exports and lower corporate profits.

If the Yen rises sharply over the near-term, look for the Bank of Japan to intervene. A strong stock market rally will be the best way to knock down the Yen as investors will most likely sell the Yen to chase the higher yield in the equities. Both of these events are strong reasons why the Yen is likely to begin a selloff shortly.

Do not expect too much appreciation in the Canadian Dollar over the short-run because of its reliance on exports to the global economic community. If other countries are not buying then falling exports are likely to be a drag on the economy. Short-covering may be encouraged if oil prices firm, but overall weaker wheat, corn and lumber should outweigh any gains in crude oil. March crude oil would have to close above $50 to have a serious impact on the value of the Canadian Dollar.

Trading could be light and directionless tomorrow for the USD CAD ahead of Friday's Unemployment Report. Both the U.S. and Canada are expected to show big job losses.

The USD CHF posted a strong gain on Wednesday after Russia had its debt-rating cut and Kazakhstan devalued its currency. New economic woes could help drive down the value of the Swiss Franc because of its economy's exposure to the Russian/Eastern European Region. Swiss banks are most likely to face the possibility of a massive amount of defaults because of the worsening financial situation. Banks that are holding toxic debt could be facing the strong possibility of more write downs in the future. This will put more pressure on the Swiss economy because banking is a large contributor to the bottom line.

Besides the deteriorating situation in Russia, Swiss banks also face the possibility of more bad debts coming from the Euro Zone. Furthermore, there is always the possibility that the Swiss National Bank floods the market with liquidity.

The one day rally in the Australia Dollar ended on Wednesday because of the lack of demand for higher yielding assets. Lower equity markets in the U.S. helped set the slightly bearish tone in the Aussie. The new economic stimulus plan announced earlier this week by the Reserve Bank of Australia is likely to have its biggest impact over the intermediate to long-term. At this time, the economy needs new jobs and more foreign demand for Australian exports. Continue to look for more downside pressure.

The New Zealand Dollar is following the Aussie. Oversold conditions may help support the Kiwi, but overall, the weak economy is likely to keep the downside pressure on this currency. There is talk already circulating that the Reserve Bank of New Zealand is poised to cut rates again. Dwindling exports and low demand for commodity-linked currencies are two reasons why the NZD USD is likely to continue to decline.

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