The U.S. Dollar finished the day lower against most majors with the exception of the Japanese Yen. Renewed interest in higher-yielding currencies following Monday's hard break in the equity markets supplied the bearishness. Traders seemed a little more optimistic today about the global economy.
Yesterday's rally in the Dollar was triggered when the U.S. rejected financial aid pleas by General Motors and Chrysler. While the decision may have seemed harsh, traders were a little more optimistic on Tuesday that a viable plan could be worked out even if it involves bankruptcy.
Additional optimism and confidence was provided by the news that the World Bank will create a new $50 billion fund to fight the decline in global trade and to encourage trading between nations.
The Euro traded higher in light trading and short-covering following Monday's hard break. Renewed trader demand for more risk encouraged traders to lighten up on the short-side on perceptions that Monday's reaction to the U.S. government's rejection of plans to bailout GM and Chrysler may have been overdone to the downside.
News that the World Bank will create a fund to stimulate global trade provided additional support for the Euro because it took some of the heat off the European Central Bank to provide additional aid to weaker European Union nations.
Gains were limited as traders were hesitant to push this market much higher ahead of the European Central Bank's expected 50 basis point interest rate cut on April 2.
British Pounds closed up on short-covering in light trading. The rally was definitely not being driven by the U.K. economy as it is still showing signs of a widening and deepening recession. A falling housing market, declining employment and the lack of consumer spending are three reasons why the British economy is not even close to a recovery.
Tuesday's rally was triggered by increased demand for higher risk and optimism over a new plan by the World Bank to provide stimulus to the global economy. Gains were limited by the possibility of new quantitative easing plans by the Bank of England.
Stronger equity markets and firmer commodity markets supported the Canadian Dollar on Tuesday. News that the GDP contracted in the fourth quarter in 2008 and is expected to worsen even further in the first quarter of 2009 encouraged some selling. Industrial prices rose for the first time since August 2008 mainly on the strong surge in metals and energy markets. These reports contradicted each other leading to a flat trade.
Concerns are building that the Bank of Canada is poised to make another interest rate cut later in the month. This may limit gains to the upside as traders will be reluctant to chase any rallies. This should be the last cut of the year and will likely lead to quantitative easing in a few months. Look for the BoC to make a statement later in the month outlining its plan.
The Japanese Yen traded weaker all day as traders reacted negatively to a bearish employment report. Investors also reacted negatively to the news that the Japanese government is proposing a third economic stimulus plan in an attempt to revive its struggling economy.
Predictions are for this new $600 billion plus stimulus package to create new demand for Japanese goods as well as about 2 million new jobs. Traders sold the Yen as this new plan amounts to flooding the market with cash to jump start the economy.
The Bank of Japan and the Japanese government want to see a weaker Yen to encourage demand for Japanese exports. Choosing to provide stimulus is not what the market expected. Most traders are looking for something more dramatic such as quantitative easing or intervention. Stimulus takes too long to move through the economy. Easing and intervention would have had a more dramatic effect on the currency and would have sent a stronger message to the global community.
The new fiscal year begins in Japan on April 1. Don't be surprised if the Yen gets hit hard as traders are expected to begin chasing higher yields after selling Yen.
The weaker Dollar helped encourage short-covering in the Swiss Franc. The dominant trend remains down however. This negative tone was set by the Swiss National Bank weeks ago when it told market participants that it favors a weaker currency. Traders are likely to be looking for rallies to sell as the odds seem to favor more downside movement over the short-run.
The AUD USD traded better on Monday in light trading. Although the yield is attractive to investors, some traders feel the recent rally is overdone and vulnerable to a correction. The main focus should be on reviving the economy. Look for the Aussie to continue to weaken over the near-term especially if the stock market falls apart. Poor economic reports may cause the Reserve Bank of Australia to schedule quantitative easing or an intervention in an effort to jumpstart the economy.
The New Zealand Dollar traded higher most of the day but collapsed into the close of the New York session. Talk is circulating that the Reserve Bank of New Zealand is poised to intervene soon. This talk stopped the rally in its tracks. The economy is the wildcard for this market. Production is down, unemployment up and the housing sector is worsening. This means the RBNZ is going to have to act aggressively to prevent a freefall in the economy.
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