Over the long holiday weekend in the U.S. the British government announced a bailout plan to inject billions of Pounds into the U.K. economy to help the ailing banking industry. In addition to the bailout, the government gave the Bank of England room to pump billions of Pounds into the economy. The British Pound plunged on the news.
The markets are clearly averse to risk at this time. Many U.S. investors are selling out positions in foreign assets and bringing the money back home to Dollars. Banking issues are once again putting tremendous stress on the financial markets. Investors are losing confidence as the optimism behind the inauguration of Obama was wiped out by today's negative tone.
Today's action indicates that the global financial markets are out of control. Traders are looking for a calming voice and have been unable to find one. For months the Fed was the voice of reason, but the inability to make the TARP money work has tarnished its leadership. The Bank of England tried to take the lead this weekend but came up woefully short with its aggressive plan to save the U.K. banking system and revive the economy at the same time. The next move is coming from either the European Central Bank or China. For months the ECB has been criticized for acting too slowly, but after witnessing the failure of the Fed and BoE plans, one has to give it credit for remaining cool while all around seem to be willing to try anything without considering the ramifications. China is a quiet player right now, but it does have foreign currency surplus to work with. It is now time for the ECB or China to step up.
The Euro finished sharply lower on Tuesday despite a better than expected ZEW indicator. The optimism shown in this report is really just hope. Investors spoke today and indicated that they do not like the risk of foreign investments in the Euro Zone. As long as turmoil in the financial markets continues to exist, look for traders to look to the Dollar as a safe haven.
Following banking system bailouts the past few days in the U.S. and the U.K., investors are now looking at the European Central Bank to provide some calm to the global financial system.
The British Pound finished the day sharply lower after the U.K. government proposed a multi-billion Pound bailout plan to save its ailing banking system. In addition to this plan the government granted the Bank of England the ability to pump billions of Pounds in an effort to stimulate the economy. Both of these plans flooded the market with Pounds and triggered the massive sell-off. It is the classic case of too much currency in the market place. Look for more downside pressure until the market can absorb this shock.
U.S. investors are once again looking at the Dollar as a safe haven investment. This has triggered a mass exodus from the Swiss Franc. Exposure to the Euro Zone, Eastern Europe and Russia make the Swiss banking system and consequently the Swiss economy vulnerable. In addition, exposure to foreign financial institutions such as U.S. banks should also be a negative factor. Investor aversion to risk should continue to draw funds out of the Swiss and into the safety of the Dollar. Look for more strength in the USD CHF. The SNB does not meet until March 12. This gives it plenty of time to make an emergency cut if economic conditions worsen.
The Japanese Yen closed higher on Tuesday as investors are once again selling their risky holdings in foreign assets and bringing them back home to Japan. Despite another report showing falling consumer confidence in Japan, investors have no choice but to repatriate as return of capital rather than return on capital has become more important.
Fear is the driving force at this time, but speculators should note that extreme volatility in the USD JPY market will draw the attention of the Bank of Japan. BoJ officials are on record saying they will tolerate movement into the Yen, but are willing to act on the currency if volatility becomes excessive.
The higher the Yen moves the more Japanese exports drop. This is causing the government to put some heat on the Bank of Japan to take action. Continue to look at the long side of the USD JPY during periods of financial turmoil, but prepare for intervention if prices get too high or the market gets too volatile.
The strength in the U.S. Dollar and weakness in most commodity markets put pressure on the Canadian Dollar on Tuesday. The rally in gold may have limited losses to the downside. The main cause of the sell-off was the 50 basis point rate cut by the Bank of Canada. Although traders had been expecting this cut because of tightening credit markets, falling business sentiment and a narrowing surplus, traders seemed to be surprised by the announcement. They may be already pricing in another rate cut in the future. A strong Dollar and falling commodity prices are likely to keep the upside momentum going in the USD CAD
The Australian Dollar fell sharply lower as investors sought the safety of lower-risk, lower-yielding assets. Falling commodity prices - especially crude oil- are hurting Australian exports. Higher gold, however, may have provided some short-term relief to Tuesday’s bearish trend. Look for more downside as long as investors remain risk averse. Based on the current deteriorating economic conditions, look for the Reserve Bank of Australia to cut its benchmark interest rate at its next meeting on February 3rd in an effort to revive the Australian economy.
The NZD USD continued its massive selloff on Tuesday. This currency pair is still reeling from last week’s credit rating cut from stable to negative by the S and P Corp. There is also the possibility of an additional rating reduction if the weak economic trend continues. Lower commodity prices and trader aversion to risk are also putting excessive pressure on this market. A new report showing inflation dropped is giving the Reserve Bank of New Zealand room to slash rates. Based on the current weakness, look for the RBNZ to cut its benchmark borrowing rate by as much as 100 basis points at its next meeting on January 29th.
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.