Risk aversion was the dominant theme in the Forex markets on Monday as world equity markets tumbled lower driven by renewed worries over the condition of the global economy. Some blame the news of troubled loans at the Bank of America as the main catalyst of today€™s broad-based bearishness.
The return of risk aversion is helping the Dollar rally across the board while eroding the optimism that the financial crisis is over. Money has been moving out of equities and into safe havens such as U.S. Bonds and the U.S. Dollar.
With reports continuing to circulate regarding the worsening and deepening global recession and speculation that another leg down is likely for the U.S. banking stocks, traders are already calling for more strength in the Dollar over the short-term.
The Euro remains under pressure as investors are losing confidence in the European Central Bank's ability to combat the deepening Euro Zone recession. At this time there has been no agreement as to how much lower interest rates should move. An additional sticking point is the non-standard quantitative easing. The problem with implementation of a quantitative easing plan is the difficulty of picking the right country to support in the European Union.
There are 26 markets in the European Union which means 26 different economies, all of which are probably suffering some degree of financial hardship. Continue to sell rallies as there does not seem to be an end in sight for the current ECB stalemate.
The British Pound remains under pressure as traders are now looking for more weakness to develop in the U.K. economy. Evidence is mounting that the economy is still contracting and that previous guesses that a bottom was forming were premature and without merit. Economists are reworking the numbers at this time to give investors a better picture as to just how weak the economy actually is and how weak it is expected to become.
Weaker equity markets and falling commodity prices are likely to keep the pressure on the Canadian Dollar. These two factors drove this currency higher and are likely to contribute to its decline.
Last week's news from China regarding a contraction in Gross Domestic Product could be a sign that demand for industrial metals is waning. A rally in industrial metals over the past few weeks has helped boost Canadian exports and improve the trade surplus.
Falling crude oil prices are also expected to keep the pressure on the Canadian Dollar. Falling exports are weakening the economy. Lower commodity prices are a concern for the Bank of Canada as it holds its monthly meeting on April 23. Most market participants anticipate a rate cut to 25 basis points and an announcement of a plan to initiate quantitative easing.
A top in the equity markets combined with the announcement of an aggressive quantitative easing plan could prove to be bearish for the Canadian Dollar.
The Japanese Yen traded higher on Monday. Weakness in the equity markets triggered the rally due to a reversal in the carry trade and Japanese investor repatriation.
The Japanese economy is not likely to show any kind of recovery until there is a turnaround in the global economy. Exports will continue to be down as long as consumer demand in the U.S. and Europe remains down. Last week's news that China had a contraction in its economy may mean less demand for Japanese goods and services.
The recent break in the Euro has put pressure on the Swiss National Bank to come up with a decision to weaken the Swiss Franc. This may mean more quantitative easing but following a statement by the SNB on Friday, is more likely to be another intervention.
An intervention at this time will send a more immediate message to the global community that the SNB wants a weaker Swiss Franc. The last time the SNB intervened was March 12. At that time the Swiss Franc dropped dramatically.
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