The U.S. Dollar had a volatile two-sided trade today as traders reacted to a friendly employment report, an unofficial report that the bank stress tests would show better than expected results and a smooth Treasury Note auction.
Overnight the U.S. Dollar was up on speculation that Bank of America would need up to $34 billion in new capital. The Dollar's gains started to erode as the New York opening approached as number crunchers began to doubt the figure.
Traders did not even have a chance to react to the BofA scenario as this morning€™s better than expected ADP employment report triggered renewed interest in risky currencies. The report showed the smallest decline in jobs lost since June 2008. The U.S. Dollar weakened on the news but then regained its strong pre-report status.
Throughout the New York trading session the Dollar tried to rally several times but each attempt was met by solid resistance. Later in the day it was learned that the final bank stress test results - which are due to be made public after tomorrow's stock market close- may have been leaked. The rumor circulating was that U.S. banks may be in better shape than expected. Dollar bulls were once again forced to exit long positions as secondary buyers would not show up to drive the Dollar higher.
Finally the Dollar lost all support late in the session on the news that the Treasury's latest $22 billion T-Note auction went better than expected. This was a clear sign to traders that maybe the stress test results were going to be nothing to worry about.
The Euro traded in a tight two-sided range today. Much of the selling pressure was related to concerns over the Euro Zone economy and the upcoming actions by the European Central Bank tomorrow. Other traders were seeking safety in the lower yielding Dollar because of growing concerns regarding the U.S. banking system. News that the S&P Corp. cut the ratings on five German banks fueled additional pressure on the Euro. This may have been related to the banks€™ exposure to Central and Eastern European toxic debt.
Tomorrow the European Central Bank meets to decide the future direction of interest rates for the European Union. With the European Union just this past weekend issuing a forecast of a severe decline in the economy, there is no question that the ECB will slash rates to 1.0%.
The difficult part is figuring out if the ECB is going to implement an asset buyback program. Even if you guess right, you still have to get the amount and the duration of the plan correct. Another item bothering traders is the possibility that the ECB will announce a plan but choose not to implement it immediately. This is what the Bank of Canada did two weeks ago, fueling the current rally in the Canadian Dollar. The mounting uncertainty triggered much of the selling pressure on the Euro on Wednesday.
The British Pound was under pressure early Wednesday as traders evened up positions ahead of tomorrow€™s Bank of England interest rate decision. The BoE is expected to keep its benchmark interest rate at 0.50% but may offer significant information regarding its quantitative easing plan. Traders are curious to see if the BoE ramps up its efforts to buy government assets in an effort to revive the economy. U.K. investors are also looking for guidance regarding the U.K.'s widening budget deficit that was estimated last month at about 90 billion Pounds.
Strong gains in the U.S. equity markets triggered by a better than estimated ADP employment report helped to support the Canadian Dollar Wednesday morning. Additional support was provided by a sharply higher crude oil market as well as firmer gold and copper.
Crude oil rallied because of a smaller than expected rise in gasoline inventory. This was good news for the Canadian economy which relies heavily on crude oil exports. Copper was up on speculation that a global economic recovery will lead to increased demand for the industrial metal. Gold traded higher as traders used this precious metal as a hedge against potential U.S. banking problems.
The sharp rise in U.S. equity markets led to selling pressure in the Japanese Yen early this morning. The rally in stocks created renewed interest in the carry trade as investors sold Yen to invest in higher yielding currencies.
Throughout the New York trading session the Japanese Yen traded on both sides of the market as stocks fluctuated between positive and negative. Trading is expected to be volatile over the next two days as traders await tomorrow's bank stress test results and Friday's U.S. Non-Farm Payrolls Report. If the reaction to today€™s release of the ADP employment report is any indication, the next two days could be characterized by a series of wild swings as traders will try to get a grasp on the direction of the U.S. economy.
The Swiss Franc saw uncharacteristically volatile trading on Wednesday. Early in the New York trading session, traders were selling Swiss Francs because of concerns over the U.S. banking system. Later in the session the Swiss Franc gained on the better than expected ADP employment report.
Trading should continue to be volatile as traders express uncertainty over the Thursday release of the bank stress test results and the U.S. Unemployment Report on Friday. Thin conditions are also contributing to the fluctuations as some of the larger traders have decided to stand aside until the U.S. economic picture becomes clearer. Late in the trading session word leaked out that the Swiss National Bank is eyeing appreciation of its currency. This could mean another round of intervention is eminent.
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