Today's report on sales of U.S. previously owned homes showed a surprise drop sending the stock market lower and the Dollar higher while rekindling fears that the recession will get worse before it gets better. The unexpected drop came after the pre-report consensus indicated that home resales would rise because bargain hunters were expected to have taken advantage of the large number of homes available because of foreclosure.

Overnight trading was mixed in reaction to President Obama's first speech to a joint session of Congress Tuesday night. Obama did not reveal any great details about the government plans to revive the economy which disappointed traders somewhat. The only real change was the positive tone of his speech which was more upbeat than his recent comments. While he made not have been as negative in his delivery as he was last week, he did mention that the current financial situation could worsen if nothing was done.

Obama also cautioned that his financial stimulus plan was only the first step toward recovery and that more money may be needed for banks, but he denied that the government's intention was to nationalize the larger banks. He also stated that there will be no real recovery unless we clean up the credit crisis which has crippled the economy. Furthermore, he added that the U.S. is working with the G-20 nations to restore confidence in the global markets. Finally, he said that there will be no movement toward protectionism but we have to find a way to spur demand for U.S. goods.

On Wednesday Fed Chairman Bernanke finished his testimony before the Senate Banking Committee by reiterating that the government is not on a path toward nationalizing major U.S. banks and that the government is well on its way to figuring out how to stabilize and fix the financial market's problems. The only negative was his opinion that the recession may continue into 2010.

The issue regarding nationalization is boiling down to semantics. If the private sector does not want to invest in bank stocks and the government puts up the money - it is nationalization whether they call it that or not. Bank stocks have been going down lately because investors believe their equity will be wiped out if the banks are nationalized. Until investors can be assured that the banking system is safe, continue to look for more fear-driven selling pressure.

Before the week's end, banks that received TARP money will be undergoing stress tests to see if they have enough capital to survive. This will be an important test to see if the government has the ability to separate the good banks from the bad banks. Basically it amounts to a pass/fail test. More negative surprises will encourage flight-to-safety buying of the U.S. Dollar.

Weakness grew in the Euro throughout the day fueled by a report that the S&P Corp. downgraded Ukraine's credit rating. This action raised fears that the Euro Zone banks were facing exposure to sovereign credit risk from Eastern and Central nations. Additional downside pressure was provided by a report that Germany's economy constricted a record 2.1% in the fourth quarter of 2008. This negative news all but sealed a 50 basis point cut by the European Central Bank at its next meeting on March 5.

Tuesday night's speech by President Obama failed to ignite any optimism in the Forex markets and traders saw no reason to seek higher yielding assets at this time. News released over night that the European Union is going to recommend that financial institutions be regulated by a financial market watch dog may have had a negative effect on trading today just because traders dislike the prospect of more regulation.

The British Pound may be forming a short-term top ahead of the announcement later this week of a plan to remove toxic assets from the books of some of its banks. Central bank buying of assets usually means more money flooding the market which can have the effect of diluting the currency. One detail of the new plan indicates that the British government will limit losses to about $728 billion of risky assets.

Early Wednesday morning a government report showed that the revised U.K. 4th quarter GDP showed a decline of 1.9%. This was in line with estimates but lower than the original number which showed a gain of 0.3%. The current weakness may be attributed to technical factors which are indicating a slightly overbought condition.

The Japanese Yen traded sharply lower overnight following the release of a report showing that exports declined a record 45.7% during January. The recent trading action suggests that the large carry trade has been officially unwound as traders are no longer focusing on the stock market buy on the Japanese economy.

The Yen turned higher following the release of the export report but this move was short-lived. Traders realized that the record drop in exports was led by the lack of demand from the United States and China. The China number was the big surprise as this indicted that their economy may be weakening faster than reported.

News that the Bank of Japan may be in the market to buy Japanese stocks in an effort to prop up the stock market may be a positive development for the economy but could be bearish for the Yen technically since putting more money into the market would devalue the currency.

The Swiss Franc traded steady-to-lower throughout the New York trading session as the U.S. Dollar regained its luster as the world’s go to currency.

Longer-term, the Swiss Franc is expected to feel more downside pressure as the contraction in the Swiss economy is leading traders to believe that the Swiss National Bank is ready to use quantitative easing and devaluation as a means of decreasing the value of the Swiss Franc in an attempt to increase demand for Swiss exports.

The Canadian Dollar gave back most of its overnight gains as the weaker equity markets encouraged traders to shy away from commodity-linked currencies. Lately the Canadian Dollar has been trading in the same direction as the stock market. News earlier this week that retail sales dropped was a sign that the global recession is no longer isolated to Canadian exports but is spreading to the domestic economy. This bad news should be enough to trigger another rate cut by the Bank of Canada next week.

Falling stock prices triggered by a weaker than expected U.S. previously owned home sales report reduced trader demand for more risky assets leading to renewed selling pressure on the AUD USD. The lack of demand for commodity prices is also leading to lower export sales which should continue to put pressure on the Australian economy. Look for the market to begin to price in another rate cut by the Reserve Bank of Australia.

Weakening Asian economies are causing a drop in New Zealand exports. This trend is expected to continue as there are signs the Japanese economy is on the brink of a meltdown and that China's economy may be worse than suspected. This news should keep downside pressure on the New Zealand economy over the long-run. Look for the Reserve Bank of New Zealand to consider a combination of an interest rate cut and stimulus plan in an effort to revive this worsening economy.

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