The Swiss National Bank hit the Forex market today with a double-whammy when it cut its benchmark interest rate down to 0.25% and simultaneously intervened. Since late January the Swiss National Bank has been talking about intervening and Thursday was the day it chose to do so. Although both the rate cut and the intervention were widely anticipated, the market acted as if the combination of the two events was not.
The USD CHF rose sharply higher after the interest rate cut/intervention as the SNB sent a message to the world that it is deliberately weakening its currency to help boost the economy. This move also sent the EUR CHF sharply higher as well as the gold market.
Look for more action from the Swiss National Bank as it remains committed to driving the Swiss Franc lower. More intervention is unlikely but not completely off the table. The next aggressive move will most likely be the buying of fixed-income assets.
The Swiss economy is going through a contraction because of the decline in exports. Sales to neighboring countries have been limited because of the recession in the region especially in the Euro Zone. Banking has been particularly hurt by the toxic asset debacle.
The Euro gained substantially against the U.S. Dollar on Thursday. Another huge move in U.S. equity markets whetted trader appetite for risk and drove investors out of the Dollar and into higher risk, higher yielding assets. Although the move was sizeable, the trend remains down in the EUR USD.
Weakness in the Euro Zone economy as well as exposure to weak economies in Eastern and Central Europe will continue to be an issue until the toxic asset mess is cleared up and resources can once again be used to stimulate economic growth.
The move by the Swiss National Bank on Thursday should put pressure on the European Central Bank to either cut interest rates aggressively or find some other creative way to revive the ailing economy.
The British Pound gained ground against the U.S. Dollar on Thursday buoyed by the strength in global equity markets. Despite recent bearish news regarding the economy and the start of a quantitative easing program, the GBP USD has been able to close higher against the Dollar for two consecutive days. These positive trading days have been more of a reflection of a weaker Dollar than a stronger Pound.
Downside pressure is expected to remain on the Pound over the near-term as quantitative easing - which is essentially the printing of money - is going to increase by the Bank of England in an effort to jump start the economy. The BoE will also be watching to see if the move by the Swiss National Bank proves to be beneficial as intervention may have to be added to the tools available to help revive the floundering U.K. economy.
A better than expected U.S. Retail Report and a firm U.S. stock market drove the USD JPY sharply higher on Thursday. Good money does not want anything to do with the Japanese Yen at this time because the economy is in shambles. Falling exports and a declining GDP are all indications that the economy is likely to worsen.
The government wants to see the Yen move lower, but the Bank of Japan has to be ready to act so that deflation does not hit the economy. Do not expect any kind of a recovery in the Japanese economy until there are signs that the economies of the U.S. and Europe are improving. Without an increase in demand for Japanese goods, expect more weakness in the Yen.
The Canadian Dollar posted a strong gain on Thursday driven higher by a strong U.S. stock market rally and a surge in oil prices. The move in two asset classes - equities and commodities - was a welcomed relief for a currency which has been suffering through a recent decline.
While not enough to change the trend to down, the break in the USD CAD was enough to make traders aware of the tremendous amount of resistance near the $1.30 area. The rally on Thursday in the Canadian Dollar was also enough take the Friday€™s unemployment report off the minds of some traders. This report is expected to show a loss of about 100,000 and for the most part has already been priced into the market.
Although the Canadian economy is still expected to weaken because of the decline in exports and key commodity prices, most traders feel the rally on Thursday may be the spark this market needs to start a short-term rally.
The firmer U.S. equity markets and the strength in commodity markets led by gold helped support a strong AUD USD market on Thursday. Look for more upside action as fundamentally the combination of steady interest rates along with a working stimulus plan is helping to support higher price in the Aussie. An increase in trader appetite for risk does not hurt either.
Unless the U.S. equity markets fall out of bed or deflation drives commodity prices sharply lower, look for the Australian Dollar to remain firm. The charts are beginning to look bullish and it is possible a bottom has been formed.
The New Zealand Dollar was able to gain ground on Thursday driven by the strong demand for higher yielding assets. Earlier in the week, the Reserve Bank of New Zealand cut its benchmark interest rate to a historically low 3.0%, but indicated that further cuts may not be necessary.
Look for short-covering to continue but do not expect the NZD USD to bottom yet as the economy still has not given signs that a recovery is taking place.
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