Now that the European Central Bank and the Bank of England interest rate decisions are out of the way, Forex traders are readying for the release of the U.S. Payrolls report. The latest guesses are for a job loss of 500K. Last month the report showed a loss in December of 524,000 jobs. With more corporations announcing layoffs earlier in the week, it is difficult to project anything better than a loss of 500,000 jobs at this time.

This leads me to believe that the employment report will not be the news which moves the markets tomorrow. Instead traders should watch for news regarding the Obama stimulus plan. In my opinion news regarding the passage of this new stimulus program will carry a lot more weight than the payrolls report. Passing the plan which may include new TARP money as well as a bank to handle toxic assets would increase demand for higher yielding assets and likely send the Dollar sharply lower.

The deteriorating financial situation in Russia and Eastern Europe should also be observed more closely. As the financial turmoil increases, concerns that the problems will spread to Western European banks increases. This could have major ramifications for the entire banking community and should not be ignored.

The short-term battle over the next few weeks will be between the Dollar bears betting on a rise in demand for higher risk assets and the Dollar bulls who want the U.S. Dollar to maintain its safe haven status while all around is crumbling.

The downtrend continued in the Euro even though the European Central Bank refrained from cutting interest rates. After the announcement ECB President Trichet hinted that inflation in the Euro Zone could become a factor going forward. I do not know where he finds his research, but it sounds like the same stuff he was reading in July 2008 when the ECB hiked its rate while the rest of the world was cutting in anticipation of a slowdown in global economic growth. Traders did not buy into his chatter as they pressured the Euro throughout the day. Based on the latest economic reports, the Euro Zone is still weakening. This may be prompting traders to price in a rate cut for March.

Euro traders should also be watching the situation in Russia and Eastern Europe. The EZ economy and the banking system may be at risk if the Russian economy collapses. Currently several European Union members have experienced similar debt-rating reductions including Greece, Portugal and Spain. Last week billionaire investor George Soros warned that the survival of the European Union will be threatened if it does not begin to address the growing global problem of toxic debt. The situation in Russia may force the EU to take action sooner rather than later.

The charts indicate the main trend is down. A new main top has been formed at 1.3071. The market will have to take out this price to turn the trend up. An old bottom at 1.2700 is the next downside target.

Traders rewarded long British Pound traders on Thursday with another strong surge to the upside. Investors have been buying the Pound since it reached grossly oversold status last week following the threat of a collapse of the U.K. banking system. The combination of aggressive monetary action and financial stimulus activity is the driving force behind the latest rally. Although the main trend is still down, the current chart formation suggests that the market has enough upside momentum to challenge the last swing top at 1.4979. A trade through this price will turn the main trend to up.

On Thursday, the Bank of England cut rates by 50 basis points to 1%. Earlier in the week, players were looking for a cut by as much as 100 basis points. A cut of only half a percent indicates that the BoE may be done cutting rates for the time being. The BoE is trying to avoid cutting rates beyond the inflation rate.

The U.K. economy may be starting to bottom out. Last week mortgage approvals jumped, earlier this week construction spending increased and today the Halifax House Price Index had an unexpected rise. This move broke a long losing streak. It is important that the housing market turns as this is the sector which turned the economy down in the first place.

The USD JPY posted a strong rally on Thursday as an intraday rally in the U.S. equity markets created a huge demand for higher yielding assets. Traders quickly sold the lower yielding Yen and bought Dollars to chase the stock rally. For weeks the Yen has remained in a tight range just above .8700. A verbal intervention by the Bank of Japan was preventing the USD JPY from breaking but the declining stock market was preventing a rally.

Thursday's action indicates that the carry trade is not dead, but may be in hibernation. Another surge in equities tomorrow could launch an additional round of selling pressure on the Yen tomorrow. The move through 90.76 turned the minor trend to up in the USD JPY. There will be an even bigger rally if the market can clear out .9300.

The Canadian Dollar remains in a short-term range with a bias to the upside. There are too many negatives working against the Canadian economy at this time. The biggest factors are declining exports and falling commodity prices.

Weakness in the Euro Zone and the U.S. economies are slowing down the exporting of Canadian goods. Downside pressure on key Canadian commodity markets such as natural gas, crude oil and lumber are also keeping a lid on any price appreciation.

Traders will be watching both the U.S. and Canadian Unemployment report tomorrow. Expectations are for Canada to show a huge increase in lost jobs as evidence is mounting that the U.S. recession is swiftly moving up north.

The USD CHF rallied again. Two factors are driving the Swiss Franc lower. The first is the threat of an intervention by the Swiss National Bank. For two weeks the SNB has been threatening to intervene in an effort to halt the rise in the Swiss Franc in order to stop the decline in exports. Secondly, the developing financial turmoil in Russia has left Swiss Banks exposed to toxic debt. So far no problems have been brought to the surface, but traders expect to see soon which Swiss banks are holding on to Russia debt.

The strong rally in equities helped increase demand for higher yielding currencies triggering a rally in the Australian Dollar. The rally in the AUD USD helped form a new main bottom at .6247. Traders are still optimistic about the Australian economy’s ability to recover from the recession sweeping the country. Earlier this week, the Reserve Bank of Australia cut its benchmark interest rate and announced a new stimulus plan. These two factors may have helped put in a bottom but it is unclear whether the trend can turn up without higher stocks and commodities.

The New Zealand Dollar is still in a downtrend, but has formed a new main bottom at .4959 following a short-covering rally on Thursday. The economy is still weak, but a strong surge in equities was enough to scare some of the weaker longs out of the market. Trader demand for risk may drive investors into the NZD USD but it may not be enough to turn the trend higher. The market needs to take out .5372 to do that. Look for this market to follow the stock market over the short-term until it gets high enough to short again.

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