Risk averse investors continued to flock to the U.S. Dollar for safety due to uncertainty regarding U.S. banks and financial institutions. The key issue for the banks is whether they will be able to survive without additional government aid or some form of nationalization.
On Tuesday, Fed Chairman Bernanke called for bold action by the U.S. government to turn the situation around. Unfortunately there are no captains of industry out there to calm the fears of the people. Congress is being linked to the poorly performing plans of late 2008. President Obama is beginning to lose the goodwill that was created after his election in November. The markets are asking for clarity of his plans to revive the economy and save the banks but no one is coming forth with the answer.
As long as there is uncertainty and fear, look for the U.S. Dollar to continue to be the most attractive alternative investment.
Treasury Secretary Geithner, who many blame for the start of this current round of selling, failed to improve his reputation when he was unable to provide an exact figure on how much the stabilizing of U.S. banks would cost the government. This is the second time that Geithner failed to give the market the answer it was looking for. Until he announces a bold plan of action with clarity of conviction, look for more downside pressure in the equity markets and more flight-to-safety buying in the U.S. Dollar.
The Euro continued to feel downside pressure as economic weakness is mounting in the Euro Zone. Not only does the European Central Bank have to deal with contracting economies, but also with the threat of banking defaults in several of its member countries. Based on the recent evidence of the worsening economy, look for an aggressive interest rate cut by the ECB at its next meeting on March 5.
The British Pound fell again on Tuesday as the U.S. Dollar strengthened because of aversion to higher risk assets. This currency pair has been going down since last week when the Bank of England and the U.K. government announced a plan to insure the toxic assets of most major banks. Traders seem to be reacting as if this plan is going to be very costly.
The Bank of England meets on March 5 to discuss a 50 basis point rate cut. The upcoming cut will likely be the BoE€™s last cut for a few months as rates will now be at 50 basis points. With the downside limited in interest rates, look for the BoE and U.K. government to announce quantitative actions in an effort to stimulate the economy, This action which is basically the firing up of the government printing press could be bearish for the Pound.
The USD JPY was able to regain its strength as a safe haven market following a two day set-back. The weak Japanese economy is leading the Bank of Japan to tap into its currency reserve which is bearish for the Yen. The BoJ is going to attempt to revive the deteriorating economy by flooding the market with excess cash. While this action may help circulate money, it is potentially inflationary if too many Yen hit the open market.
Downside pressure remains on the Swiss Franc. Trader aversion to risk is driving investors to the U.S. Dollar along with the fear of a Swiss National Bank intervention. The market is also looking for the SNB to begin a system of quantitative easing which means more Swiss Francs will be in circulation. Both the intervention and quantitative easing plans are designed to make the Swiss Franc cheaper in an effort to increase demand for Swiss exports.
The Bank of Canada cut it its key interest rate to 0.50%. This was in response to falling retail sales and a drop in GDP. These are both signs that the recession which has so far been limited to the global community has now spread north to Canada. The government also announced a joint stimulus plan with the Bank of Canada. Although no strong details were provided, this plan is likely to struggle like the plans developed by the U.S., the European Central Bank and the Bank of England.
Whatever plan it develops it will not be able to force the world to buy Canadian products. Demand for exports like crude oil and natural gas are not going to turn around until the global economy starts to show a recovery. As long as equity prices and commodity prices remain in a tailspin, look for the USD CAD to continue to rally.
The Reserve Bank of Australia surprised everyone today by leaving interest rates unchanged. Speculators had built in a 50 basis point cut because of falling exports and less demand for commodities. Traders will now be focused on tomorrow€™s GDP figure to see if there has been an increase since the first stimulus plan announced in October 2008. An increase in fourth quarter GDP could be bullish for the Australian Dollar. The RBA refused to cut rates because it felt that the stimulus plans it implemented in October 2008 and 2009 were helping to improve the situation.
The NZD USD felt downside pressure on Tuesday following the decision by the Reserve Bank of Australia to leave interest rates alone. This action sent buyers into the Aussie and sellers into the Kiwi. The Reserve Bank of New Zealand does not meet until March 12 which means there may be downside pressure on this market for another week. Falling exports and trader aversion to risk are also bearish factors in this market. Look for the downside pressure to continue.
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.