U.S. retail sales declined for the six-straight month sending Euro traders to the safety and liquidity of the U.S. Dollar. The move showed that the market is gearing up for a prolonged global recession.
Earlier in the week the Euro was met with selling pressure because of the narrowing U. S. trade deficit and perceptions that the European Central Bank is falling behind the other major central banks in their battle to prevent the rapidly worsening global recession. Traders cited the recent bearish economic numbers out of the Euro Zone as the main reasons that the ECB should act aggressively now.
Additional pressure was heaped on the Euro this week from the S&P Corp. This rating service cut the debt rating of Euro members Spain and Greece. This was further evidence that the Euro Zone recession is rapidly spreading.
Investors want to see the ECB make an aggressive rate cut of at least 75 basis points by tomorrow morning. Anything less than 75 basis points could trigger a huge short-covering rally in the Euro.
The British Pound is weak, but still hovering over last year's low and near the low of this year. Downside pressure is building as traders anticipate more bearish economic news. Home and retail sales are down, credit markets are tightening and overall business confidence is down. These factors indicate just how fragile the U.K. economy is at this time. A combination of aggressive interest rate cuts and economic stimulus is needed to prevent this economy from sinking into its worst recession in history.
The USD CHF traded flat to higher on Tuesday. Traders bought the U.S. Dollar as a safe haven against the weaker Swiss Franc. The recession in the Swiss economy is getting worse as Euro Zone and Eastern European economic weakness is spreading. The Swiss National Bank does not meet until March 12, but a further slowdown in the economy may prompt it to cut interest rates sooner.
The Japanese Yen rallied again on Wednesday as traders once again shunned risky assets and sought the safety and liquidity of the Dollar. The USD JPY started out weaker but by the end of the session ended lower when the U.S. equity markets fell apart. Japanese exports and corporate profits are expected to continue to weaken as long as the Yen is strong. This is prompting pressure by the Japanese government on the Bank of Japan to take an aggressive stance against any further rise in the Yen. Look for a possible intervention and monetary action by the BoJ.
The USD CAD rallied on Wednesday following the release of worse than expected U.S. Retail Sales numbers. Traders bought Dollars and sold Canadian on expectations the recession would weaken the Canadian economy. Earlier this week the Canadian economy was hit with bad news which indicated that credit was tightening, the export surplus was narrowing and business sentiment was falling. Look for further weakness in the Canadian Dollar as long as energy prices and other Canadian exports continue to drop. Based on the recent reports, and the grim outlook for the economy, look for the Bank of Canada to slash interest rates at its next meeting on January 20.
Lower commodity prices led by crude oil are putting pressure on Australian exports leading to a decline in the Australian economy. In addition to the weakness in the economy, traders are shying away from risky, higher-yielding assets. Look for the weakness to continue as the global recession worsens. This news is prompting speculation that the Reserve Bank of Australia will cut interest rates at its next meeting on February 3.
Look for more downside pressure in the News Zealand Dollar as falling commodity prices and lower exports are prompting speculators to call for another rate cut by the Reserve Bank of New Zealand. At its next meeting on January 29, look for the RBNZ to cut rates by as much at 100 basis points. The lack of demand for higher yielding assets is also putting pressure on the market. Traders are looking for return of capital not return on capital.
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