News that the U.S. government would up its stake in Citigroup drove up global equity markets overnight, but trader appetite for risk failed to materialize, and the equity markets took a dive after sellers came in on the open.
Traders approached the overnight Forex trading session with caution because of the rumor of the Citigroup buyout. Defensive positions were lightened up in the three flight-to-safety markets - gold, Treasury bonds and the U.S. Dollar. For a while until the U.S. trading session opened, it appeared that the U.S. Dollar was going to get creamed. Traders were licking their chops at the prospect of more Treasury money flooding the markets and were aggressively buying the Euro and British Pound.
The follow-through rally in the Euro and British Pound failed to materialize as U.S. equity traders voted no go to the buyout plan and aggressively sold stocks from the get-go. In what amounted to a tale of two trading sessions it was clear that U.S. traders do not want to see the government get bigger and involved with running a private entity. Say No to Nationalism was the theme of the day once the markets opened in the U.S.
The Euro could not hold on to early gains brought on by the prospect of the U.S. Federal government buying up to a 40% stake of Citigroup. Trader appetite for risky assets failed to materialize as U.S. equity traders voted early and often to short the market from the opening. This turned the EUR USD lower and selling pressure persisted throughout the session.
Without the Citigroup buyout plan to support it, traders were left to focus on the deteriorating Euro Zone economy and its potential exposure to downgraded banks in Central and Eastern Europe. Traders are also starting to factor in an aggressive rate cut of between 50 and 100 basis points by the European Central Bank at its next meeting on March 5.
The British Pound is traded higher overnight as a combination of optimism about the Bank of England's plan to shore up its banking system and the weaker Dollar helped attract buyers. The U.S. Dollar was under pressure because of the rumor of a potential purchase of up to 40% of Citigroup stock.
U.S. stock traders expressed their opinion about the Citigroup plan by aggressively selling equities from the start. The failure to instill confidence in the U.S. banking system lead speculators to pare long positions bought in the overnight market. By the end of the day the GBP USD still posted a gain on the day, but was well off its high.
The British Pound is still looking strong despite the set-back from the high on Monday. Traders are gaining confidence in the recent moves by the Bank of England and the U.K. government to shore up the economy. Speculators seem to like the combination of interest rate cuts and financial stimulus.
Late news that the Royal Bank of Scotland is getting ready to segregate toxic assets in preparation for a government insurance program to be announced later this week is also helping to provide support at this time.
The Japanese Yen traded lower all day on Monday. Despite the weaker U.S. Dollar in the overnight session because of the possible purchase of Citigroup stock by the U.S. government, the Yen remained under pressure. The selling pressure continued throughout the New York trading session.
Speculators are looking at the Japanese economy and not liking what they are seeing. The economy appears to be approaching a major meltdown. Exports are down because of the lack of consumer spending - especially in the U.S. Continue to look for more weakness until global demand for Japanese goods increases.
Selling pressure continued to hurt the Swiss Franc on Monday. Speculators are betting on the short-side because of the possibility of quantitative easing and devaluation. News that the SVP, the major ruling party in Switzerland, is calling for a boycott of U.S. goods and the repatriation of Swiss gold held in the U.S. is failing to gain any legs. The SVP is upset because of the U.S. government's pursuit of tax cheats in Switzerland.
The possibility of an increase in trader appetite for risk helped support the Canadian Dollar overnight, but failed to materialize during the New York trading session. The possible move by the U.S. government to buy up to 40% of the Citigroup stock was driving the U.S. Dollar lower. Traders were buying the Canadian Dollar in hopes that the weaker U.S. Dollar would help boost commodity prices
Selling pressure in the equity markets helped drive traders out of commodity-linked currencies, putting pressure on the Canadian Dollar. News that Canadian Retail Sales dropped more than expected helped boost the USD CAD by the end of the day as traders are now confident the Bank of Canada would cut interest rates at its meeting next week. The concern in Canada is that exports are not the only problem, but domestic issues are beginning to indicate a further deterioration of the economy.
Lower commodity prices and a dramatic selloff in equities to 12-year lows put downside pressure on the Australian Dollar. Trader appetite for risk was down as speculator demand for higher risk assets dropped when it became clear that U.S. traders were not willing to accept the U.S. purchase of up to 40% of Citigroup. Continue to look for more downside pressure as fear is gripping the market once again and traders are putting their money in safer assets such as gold, U.S. Treasuries and the U.S. Dollar.
Continue to look for more downside pressure on the New Zealand Dollar as long as trader appetite for more risky assets remains down. Furthermore, the weakness in the Japanese economy is leading to a drop in exports. Pressure from both a drop in the economy and exports is likely to continue to attract sellers. It looks as if the Reserve Bank of New Zealand will have to cut interest rates again in an attempt to revive the economy.
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