Equity markets traded higher on Tuesday based on positive comments from Citigroup CEO Pandit. In a memo Pandit noted that Citigroup is having its best quarter since 2007 when it was last profitable. He also noted that the bank's stock price does not reflect its capital strength.
This news sent stock markets higher in Europe and Asia. The desire for more risky assets also spread to most Forex markets putting pressure on the U.S. Dollar. The rise in the stock market and the desire for higher risk assets put pressure on the three safe-haven markets: Treasuries, gold and the U.S. Dollar while supporting commodity markets such as soybeans and copper. Investors were most noticeably supporting commodity-based currencies.
The U.S. Dollar lost much of its luster as a safe haven market today despite potentially bullish comments from Fed Chairman Bernanke. Bernanke stated that sustainable economic recovery is out of reach until the U.S. financial system is stabilized, yet offered no date as to when this would be accomplished. He also noted that a lot would have to be done by governments worldwide to break out of the current global economic downturn.
The Euro traded higher on Tuesday despite a report showing that industrial production in the Euro Zone was down. Gains reflected more the weaker U.S. Dollar than a stronger Euro. Traders who bought U.S. Dollars for safety and security during the recent banking turmoil began selling Dollars overnight following positive comments regarding Citigroup and continued throughout the day as U.S. equity markets rose. Traders were less averse to risk throughout the day.
Early in Tuesday's trading session traders took a break from the bearish news affecting the U.K. banking system and bought British Pounds in the overnight market. Pound traders were willing to take on a little more risk in the morning because of the strong surge in equity prices following optimistic comments from Citigroup CEO Pandit.
Gains could not be maintained after the release of a bearish U.K. Housing Sales report. This report showed that housing sales fell to the lowest level since 1978 and revealed that the British Pound is vulnerable to downside risk. Investors are becoming nervous about the fate of the Pound due to the banking crisis, falling housing numbers and Bank of England quantitative easing.
The weaker U.S. Dollar triggered a profit-taking rally in the Japanese Yen on Tuesday. A bad economy led by weak exports and a current account deficit have been putting pressure on the Yen. The news that Citigroup may be in a position to post its best quarter since 2007, drove traders out of the U.S. Dollar and into higher risk assets. The rally overnight reflects more Dollar selling than Yen buying. Over the short-run there may be a short-covering rally, but longer-term, the fundamentals support a stronger Dollar.
The Swiss Franc opened stronger as the U.S. Dollar lost some of its luster as a safe haven currency. Traders were buying Swiss Francs and selling the U.S. Dollar following positive comments from Citigroup CEO Pandit. In his statement he noted that Citigroup is experiencing a strong quarter and that the current price does not reflect its capital strength. Traders were more inclined to buy higher risk assets this morning because of the strength in the stock market.
Weakness began to build in the Swiss Franc throughout the day as talk circulated that the Swiss National Bank would cut its benchmark interest rate to .25% on March 12. The goal of the SNB at this time is to help the country avoid a cycle of deflation as Switzerland goes through its worst recession in 3 decades. Some traders feel the USD CHF is overbought but the Swiss government wants to see lower Swiss Francs to stimulate exports to help revive the economy.
This interest rate cut is expected to be the last this year as the SNB will now begin to use quantitative easing and intervention to help stimulate the economy.
The Canadian Dollar closed higher on Tuesday based on the strength in the global equity and commodity markets. Friendly news regarding Citigroup drove equity prices higher and increased demand for higher risk assets. The news that OPEC was considering another production cut helped buoy the crude oil market early in the trading session.
This rally is only short-covering as the Canadian economy is still experiencing a major drop in growth based on the recent decline in GDP. Canadian Prime Minister Harper even said that the world economy will not emerge from the recession until the U.S. repairs its financial industry. Bearish USD CAD traders are hoping the Citigroup news is a sign that the U.S. banking industry is bottoming. Bullish Canadian Dollar traders believe that Canada is in a good position to emerge faster from the global recession because their banking and finance systems are in better shape.
The strong rally in the U.S. equity markets because of bullish comments regarding Citigroup's finances helped trigger increased demand for higher yielding assets driving traders to buy the Australian Dollar. Traders supported the AUD USD throughout the day despite news that Australian Business Confidence remained near a low level and unemployment was expected to rise.
Traders had been anticipating a rally in the Aussie for days but thought it was going to be driven by higher commodity prices. News that the Baltic Dry Index was rising again was fueling talk of increased demand for commodities. The fact that the rally was driven by higher equity markets is making investors think that a bottom could be forming in the AUD USD.
The rally in the U.S. stock market along with firm commodity prices helped the NZD USD overcome early weakness to post strong gains at the end of the day. The New Zealand Dollar was trading weaker before the opening in anticipation of another interest rate cut by the Reserve Bank of New Zealand.
Investors expect the RBNZ to cut interest rates by as much as 50 basis points to 3% in an effort to prevent deflation from hurting the economy. Some traders are calling for a stimulus plan similar to the one that Australia enacted recently. Another interest rate cut combined with stronger commodity and equity prices will be the best for this market. At this time the NZD USD needs as much support as it can get because the chart formation indicates it is vulnerable to downside risk.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.