The U.S Dollar closed sharply higher against most major Forex markets on Monday as the selling assault on equity markets continued. Lower overnight stock markets started the flight-to-safety buying early in the trading session which continued into the close in New York.
Foreign currency markets were down all over the world as global banking issues continued to dominate the news. Traders are buying the Dollar because they feel that the U.S is the safest place to be despite having its own problems with the economy.
The Euro traded lower overnight and into the close in New York. The stronger Dollar pressured the Euro throughout the day as investors believe that the Euro Zone economy is going to weaken further. Traders are already anticipating another interest rate cut by the European Central Bank at its next meeting on April 2.
Investors are also anticipating quantitative easing by the European Central Bank in an effort to help revive the Euro Zone economy. The only problem with this idea is which European Union member nation should be bailed out since there are sixteen member nations..
Choosing a nation to bailout through the purchase of securities is bound to cause major problems amongst the member nations. At this time every member could use some help. Providing aid to the weakest nations will conjure up talk of throwing good money after bad, but leaving the situation as is can be devastating to the survival of the European Union.
Something has to be done quickly because the rating services may downgrade Euro Zone banks at any time. A negative credit rating will cause all Western European banks to suffer in a trickle down effect. One problem that is likely to arise in the near-term involves interest rates. The European Central Bank is on a path to lower rates again while some struggling EU members may have to ask for higher rates because of their poor credit ratings. Look for economic instability as the interest rate spread between good countries and bad countries is likely to widen.
British Pounds were trading sharply lower overnight which led to more selling pressure on the opening in New York. Traders sold the Pound because of weakness in HSBC stock and news that Lloyds agreed to sell up to a 77% stake in its company to the U.K. government in exchange for toxic asset insurance.
Look for more pressure on the British Pound as traders anticipate a series of quantitative easing moves to help stimulate the economy. Having cut interest rates to almost near zero, the Bank of England is running out of options and may have to intervene immediately to get the economy back on track. Quantitative easing is just a fancy way to say print more money. Just about anything the BoE does will be perceived as bearish.
The Japanese Yen opened lower in New York following heavy selling pressure overseas. More bad news about the Japanese economy was released before the U.S. opening. Overnight it was announced that Japan suffered its first current account deficit in 13 years. This grim report is an indication that the global recession is killing Japanese exports. Falling equity markets and lower interest rates also contributed to a decline from overseas investments.
The Japanese government wants the Yen to weaken to attract more exports, but it looks as if the Yen price has nothing to do with the lack of demand. Recessions in the economies of two of Japan's biggest customers - Europe and the U.S.- are curtailing demand for Japanese goods. Do not expect a turnaround in the Japanese economy until global consumers start spending again.
The Swiss Franc traded mostly lower overnight but managed a small gain on short-covering in New York. Traders for most of the day were selling the Swiss and putting money in the safer U.S. Dollar. Banking problems and an economic contraction in the Swiss economy are also leading investors to the Dollar.
The Swiss economy is officially in a recession based on a decline of 0.3% in the 4th quarter GDP. Negative growth because of lower exports to key financial centers in the U.S. and Europe is to blame for the drop in production. Until the U.S. and Euro Zone economies get rolling again, continue to look for more downside pressure on the economy.
Inflation is up a little in Switzerland, but this news is not likely to cause the Swiss National Bank to raise interest rates at its next meeting on March 12. The interest rate decision by the SNB will dictate the direction of the USD CHF this week. Hiking rates will bolster the Swiss Franc while cutting rates to under 50 basis points will weaken the Swiss Franc. The best call at this time is for the SNB to leave interest rates unchanged at 50 basis points.
If the SNB decides to leave interest rates unchanged, this may mean they are getting ready to apply quantitative easing. This will imply that they will be in the market for government bonds or other corporate assets. Flooding the market with cash will be bearish for the Swiss Franc. It all comes down to what they decide on March 12.
The Canadian Dollar experienced downside pressure today as a weak Canadian economy overshadowed the increase in crude oil. Under normal circumstances, the USD CAD would have broken hard had traders been basing its direction on crude oil instead of the economy.
The USD CAD poked through $1.30 on Monday for the first time in four months. This rally is reflecting the lack of confidence in the rapidly deteriorating Canadian economy. Lower 4Q GDP along with the possibility of a huge loss of jobs are signs that the Canadian economy is worsening. It seems like it is just a matter of time before Canadian banks start to show cracks because of the worsening economic outlook.
With no where to go but up in regard to interest rates, look for the Bank of Canada to begin a program of quantitative easing in an effort to revive the economy by flooding it with fresh cash. Although this is a risky practice because of the strong possibility of inflation later in the economic cycle, it is the best alternative method to get the banks in a cash-rich position to encourage lending.
Falling equity markets triggered a break in the Australian Dollar on Monday. Risk averse traders took money out of the Aussie and returned to the U.S. Dollar as global equity markets broke on the news of banking problems in the U.K. With apparently no solution in sight for the worsening global banking crisis, continue to look for more weakness in the equity markets and consequently more flight-to-Dollar trading.
Traders will be watching the Australian Unemployment Report on March 11 for clues as to the next move by the Reserve Bank of Australia. A weaker unemployment report along with the already announced lower GDP could make the RBA think twice about keeping interest rates unchanged at its next meeting on April 7.
The New Zealand Dollar continues to remain under pressure as traders are shying away from higher yielding currencies in favor of the safer U.S. Dollar. Slow growth and low inflation are plaguing New Zealand at this time, but this does not that mean the Reserve Bank of New Zealand is going to slash rates dramatically at its next meeting on March 12.
Based on the statement after its last rate cut on January 29, look for the RBNZ to limit its next cut to 75 basis points. A cut of this size may be enough to stimulate growth but not enough to trigger inflation. Even with a rate cut, however, the economy will not turn on a dime. Demand from Asia has to pick up considerably as exports continue to fall.
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