The U.S. Dollar traded higher on Monday against most majors except the Japanese Yen as traders have renewed their interest in the Dollar as a safe haven currency.
Bearish news regarding U.S. automakers General Motors and Chrysler triggered profit-taking in stock markets around the world and encouraged investors to move funds into the safety of the low-yielding U.S. Dollar. Once again traders are looking for return of capital rather than return on capital.
Other issues that made traders nervous included a bank failure in Spain and its subsequent takeover by the Spanish government and negative comments about the banking sector by Treasury Secretary Geithner.
The news that the U.S. rejected requests for additional aid by General Motors and Chrysler is leading to speculation that the two auto giants will merge or declare bankruptcy. The failure of these two companies will have tremendous ramifications because of a trickle down effect on the economy.
GM debt holders such as pensions and financial institutions could face exposure if GM is allowed to fail. I suspect that TARP money will be used indirectly by financial institutions to cover losses from GM debt. How ironic will it be if GM fails because it didn't get the financial aid it needed, yet financial institutions holding worthless GM paper get bailed out by the government?
Suppliers of auto components to GM are also on the hook for billions of dollars in goods and services. This unfortunately could travel through many sectors of the stock market.
A failure of a bank in Spain also jarred the currency markets overnight. Although the Spanish government was able to salvage assets with a takeover, this event served as a reminder to European and U.S. investors that there are still toxic assets weaving their way through the global banking system. Euro traders should pay particular attention to this event since it is in your own backyard.
Additional strength in the U.S. Dollar was triggered by comments over the weekend by U.S. Treasury Secretary Geithner. He commented on one of the hundred talk shows over the weekend that some banks will need large amounts of assistance. This statement served as a reminder to investors that there are still unresolved banking issues out there.
Finally, the G-20 nations meet on April 2. (Coincidently the European Central Bank meets the same day to make perhaps its biggest interest rate decision in its ten-year history). G-20 topics to be discussed include banking issues in Eastern and Central Europe, global interest rates and coordinated quantitative easing and intervention. Most observers think this meeting will be more than a photo-op as members are expected to address the issue of restoring global growth by the end of 2010.
Add a Spanish bank failure to the recent bearish news hitting the Euro Zone. This event and the return of risk aversion are likely to keep the downside pressure on the Euro. Traders are now looking for at least a 50 basis point cut but most of all, some kind of stimulus package or quantitative easing program.
Evidence is mounting that the recession in the U.K. is widening and deepening despite mammoth efforts by the Bank of England and the British government to provide multiple layers of economic stimulus. With nowhere for interest rates to go but up, look for the BoE to hit the economy again with more aggressive quantitative easing. This printing of money should weaken the British Pound further.
The Swiss National Bank is finally starting to achieve what it set out to do several weeks ago when it lowered interest rates and intervened against the Swiss Franc. The SNB believes in a lower Swiss Franc and stands prepared to act accordingly. Greater demand for lower-yielding assets is likely to keep upside pressure on USD CHF.
Falling commodity and stock prices helped drive the Canadian Dollar lower on Monday. This decline is likely to continue as more money is expected to come out of the equity markets. Bearish news about the possible bankruptcy of automakers General Motors and Chrysler also contributed to the decline. Canada faces exposure to a failure of GM because of the numerous small Canadian firms that do business with the auto making giant.
Fear that bankruptcies at GM and Chrysler will delay an economic recovery drove crude oil prices below $50. Traders are now speculating that demand for energy will continue to drop lower. Lower crude oil will weaken the Canadian economy because of this nation's reliance on oil exports. Look for more downside pressure until equity markets discount the current bearish events.
Today's break in U.S. equity markets was triggered in Asia overnight following the news of the U.S. government's rejection of a plan to bailout automakers General Motors and Chrysler. This caused a massive repatriation out of risky assets and into the safe, low-yielding Japanese Yen.
A rising Yen could pose problems for the Japanese government and the Bank of Japan. Both want to see a lower Yen to boost exports so more quantitative easing or a fresh round of intervention may be necessary to achieve this. Recent government reports suggest that the economy has more downside to go before there is a turnaround. Reliance on trading partners in the U.S. and Europe who are going through recessions of their own is likely to keep downside pressure on the Japanese economy.
Now that equity and commodity market bulls have been brought back to earth, Australian Dollar traders are running scared as they try to avoid risk at all costs. The end of the bull-market, or bear-market rally or dead-cat bounce is going to make investors look harder at economic conditions. Economic reports out of Australian have been bearish recently and conditions are expected to worsen as Australia's trading partners have cut-back their demand for Aussie goods.
Lower production numbers, weaker consumer spending and rising unemployment are the main reasons why the Reserve Bank of Australia may cut interest rates further. If worsening conditions begin to accelerate then look for the RBA to apply more drastic means to stimulate the economy including a fresh stimulus plan, quantitative easing and a possible intervention.
Greater aversion to risk drove speculators out of the NZD USD on Monday. Fear that bankruptcy by GM or Chrysler will cripple the U.S. economy is driving investors out of higher-risk, higher-yielding assets. Falling stock and commodity prices will now force bullish traders to focus on the New Zealand economy and the picture isn€™t pretty.
Production is down, unemployment is up and exports are down. These conditions would normally lead to an interest rate cut, but the Reserve Bank of New Zealand is fed up with how long it takes a rate reduction to work its way through the economy. In an effort to get a more immediate response from the economy look for the RBNZ to be more aggressive. This may mean quantitative easing or an aggressive intervention.
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