The U.S. Dollar regained its power as a safe haven asset on Thursday following another day of selling pressure in the global equity markets. Stocks were down worldwide as a series of negative economic events triggered a cascade of selling pressure throughout the New York trading session.
Selling pressure began overnight when China failed to announce another economic stimulus plan. The bullish tone on Wednesday which was created by speculation that China would commit big bucks to an additional plan to revive their economy eroded suddenly as traders immediately sold stocks and commodities while simultaneously buying safe-haven assets like gold, the Dollar and Treasury Bonds.
While the U.S. Dollar was rising, the European Central Bank and the Bank of England both slashed interest rates by 50 basis points feeding more fuel into the Dollar. A report indicating that GM may have to file bankruptcy triggered additional flight-to-quality buying. Finally, another weak U.S. economic report indicating more jobs were lost last week pushed equity markets sharply lower while helping to attract a final wave of flight to safety buying in the U.S. Dollar.
The Euro finished the day weaker following a surge in selling pressure as worried traders sought the safety and security of the U.S. Dollar. The European Central Bank cut its benchmark interest rate by 50 basis points, leaving it room to make an additional cut at its next meeting. Following the announcement ECB President Trichet mentioned in a speech that the Euro Zone economy is going to continue to weaken further and that more rate cuts are likely. He also mentioned that inflation is not a concern but that economic forecasts indicate that inflation is expected to be well below its target driven by weaker commodity prices.
Also speaking today was ECB member Weber who announced that the ECB is prepared to use quantitative tools if possible to protect the economy. The issue with using this sort of stimulus is which Euro Zone assets to buy, if necessary, since there are 16 members in the Union.
Both the Euro Forex and the bond markets reacted as if another rate cut is coming along with quantitative activity. Continue to look for more downside pressure.
The British Pound was weaker on Thursday driven lower by an interest rate cut by the Bank of England and talk of a major quantitative move by the BoE. Bank officials cut interest rates by 50 basis points to 50 basis points as expected. Traders are speculating that this is likely to be the last cut for several months.
Following the rate cut announcement, the BoE announced plans to buy over $105 billion of corporate and government bonds. This quantitative easing move floods the market with cash and is usually bearish for the currency. With interest rates so low and not expected to go any lower, continue to look for the BoE and the U.K. government to look for additional ways to stimulate the economy and provide the system with liquidity.
The USD JPY continued to gain strength most of the trading session because of the deteriorating Japanese economy. Money is leaving Japan and headed to safety in the U.S. Dollar. With no room to cut interest rates, look for the Bank of Japan to become more aggressive in its moves to provide liquidity to the system. One popular quantitative technique is to buy corporate and government assets. Look for more purchases in this area as the BoJ is becoming concerned about an impending credit shortage in Japan.
The USD CHF traded higher on Thursday as traders continued to use the U.S. Dollar as a safe haven asset. The contracting Swiss economy as well as the deteriorating banking system is expected to trigger additional weakness in the Swiss Franc.
Swiss exports to Euro Zone members are falling. This is leading to speculation that the Swiss National Bank may attempt to intervene with selling pressure in an effort to weaken the Swiss Franc and drive up exports. Possible Swiss banking exposure to toxic banks in Eastern and Central Europe may also weaken the banking system extensively. Right now it is only a concern, but a downgrade of Eastern and Central European banks may lead to loan defaults.
The Canadian Dollar continues to follow the equity markets lower. Falling commodity prices are also helping to weaken the Canadian economy as major exports such as crude oil and natural gas are becoming a drag on the Canadian trade surplus account.
There is evidence that the global recession is spreading north to Canada. Retail sales are down while GDP is falling. This news prompted an interest rate cut this week by the Bank of Canada. The Canadian government also announced an economic stimulus plan although no details have been revealed.
Canada has a real problem since its economy relies so much on exports. As long as the recessions are deepening in the U.S. and Europe, look for export sales to continue to drop. Expectations are for the USD CAD to move higher over the long-term.
The Australian Dollar lost most of its gains from Wednesday as the expected announcement of a stimulus plan by China never materialized. The AUD USD was driven higher on Thursday on speculation that China would pump money into its economy which would eventually find its way to the Australian economy. The Aussie economy relies heavily on export sales to Asia. With most Asian nations nearing or in recessions, the lack of fresh buying by China was not welcomed news.
Earlier in the week the Reserve Bank of Australia chose not to lower interest rates which caught many short-sellers by surprise. On Wednesday the Australian government reported a lower than expected GDP figure. Without fresh exports to Asia, traders are expecting the Aussie GDP to continue to drop, and the RBA to catch up to the rest of the world with another rate cut. Speculators may be in the process of selling the AUD USD in anticipation of this rate cut.
The lack of exports to Asia is taking its toll on the New Zealand economy. This concern is leading to speculation that the Reserve Bank of New Zealand will lower interest rates at its next meeting. The weakening economy is also leading speculators to anticipate another drop in New Zealand GDP. Falling equity prices and flight-to-safety buying in the U.S. Dollar, gold and Treasury Bonds is also putting pressure on the NZD USD which usually goes up when trader appetite for risk increases. As long as speculators remain averse to risk, look for more downside pressure.
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