Risk aversion led investors back to the U.S. Dollar this week. Traders repatriated their Dollars out of fear that the growing global recession will erode the value of higher yielding assets. Friday's news that the U.S. GDP fell by less than the consensus also boosted trader interest in the Dollar. The market had been anticipating a contraction in the economy by as much as 5.5%. The number came in better than expected at 3.8%. Although traders bought the Dollar on the news, it should be noted that missing the estimate by this much could indicate that the worst is yet to come.
The Euro had a terrible week versus the Dollar. Early in the week the EUR USD was showing signs of a bottom as trader appetite for risk increased over optimism regarding anticipated Fed activity, a new Obama stimulus plan and plans to create a bank for toxic assets. When none of these items materialized, the Dollar began to take back some of its losses.
The Euro accelerated late in the week when investor George Soros warned that the Euro would not survive if the European Union did not come up with a global plan to address the growing toxic asset problem. On Friday the Euro weakened even further as economic reports showed the economy slowing and unemployment increasing in the Euro Zone. This prompted traders to take aggressive short positions in anticipation of a 50 to 100 basis point interest rate cut by the European Central Bank at its next meeting on February 5.
The British Pound gained ground this week against the Dollar and almost reversed last week's losses entirely. The Pound was under pressure recently from the threat of nationalization of struggling banks. The U.K. government also offered tremendous amounts of money to provide for the solvency of its financial system. The market turned around early Monday when Barclay Bank announced better than expected results and also told the U.K. government thanks, but no thanks to the offer of monetary aid.
This news triggered a strong short-covering rally throughout the week that carried over to Friday when the U.K. announced that mortgage applications had increased considerably. This is a good sign for the U.K. economy because the tight mortgage market and falling real estate prices are being blamed for the cause of the worst depression in decades.
Next week is another story however. So far the rally has been short-covering in a bear market. There are no signs that the trend is ready to turn up. Although a bottom may be forming, chart watchers will be looking for a successful test of the recent low before issuing a buy signal. Furthermore, the Bank of England is expected to cut its benchmark rate by 50 to 100 basis points on February 5. This news is likely to put a lid on any spectacular gains next week.
The USD JPY gained ground last week, but the action did not produce the breakout rally that many traders have been looking for. The weakness in the stock market late in the week halted gains as traders sold riskier assets financed with cheaply-borrowed Yen.
News that the Japanese economy is worsening is leading speculators to believe that the top is in for the Yen. Exports and corporate earnings are down as factory output continues to weaken. Unemployment also surged during the latest reporting period. The verbal threat of an intervention by the Bank of Japan has also caused traders to be leery of buying the Yen at current levels. Look for the start of an uptrend in the USD JPY if this pair can close over 90.50.
The shrinking U.S. economy is putting pressure on the Canadian economy. Canadian exports are down and its trade surplus is narrowing. Canada relies heavily on the U.S. consumer. The U.S. consumes more than 3/4 of Canadian exports. The weakness in the U.S. economy combined with a better than 50% decline in crude oil prices and slowing global demand for food and raw materials, should continue to help build downside pressure on the Canadian economy.
Earlier in the week the Canadian government announced its first budget deficit in ten years. They also vowed to do whatever it takes to protect the economy from further deterioration. The only problem is that Canada has to rely on everyone else. As long as its two biggest customers - the U.S. and the Euro Zone - remain in recessions, there is no way the Canadian economy can recover in a timely fashion. Look for more downside pressure on the Canadian Dollar.
The Swiss Franc finished the week lower versus the U.S. Dollar. Beside the contraction in the Swiss economy due to falling exports, the threat of an intervention weighed on traders' minds. On January 22 the Swiss National Bank announced that they would intervene in a massive way in order to defend the Swiss economy against deflation. On January 29, SNB President Jean Pierre Roth reversed the tone and said he did not see any overshooting of the currency. This effectively took the threat of intervention off the table. On Friday, however, the Swiss President said he would back an SNB decision to sell the Franc. This indecision is leading speculators to believe the safest place to be right now is long the USD CHF.
The Australian Dollar fell versus the U.S. Dollar this week as risk aversion led investors to sell higher-yielding, higher-risk assets. Investors do not care about return at this time, they are happy with low yields and safety. Falling commodity prices are also hurting the Australian economy. With economic growth falling, the Reserve Bank of Australia has room to cut interest rates by as much as 100 basis points at its next meeting on February 3.
Pressure on commodity-linked currencies led to a decline in the New Zealand Dollar this week. Less demand for higher-yielding assets also contributed to the decline. The main cause of the sharp break was the 1.5% slashing of the benchmark interest rate by the Reserve Bank of New Zealand. This cut was greater than forecast and is leading to speculation that it will cut further as the depression in New Zealand worsens.
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.