During the last two trading days the U.S. Dollar has acted as if it is going through a transition period. Now that that the fear of bank nationalization has been squashed by Fed Chairman Bernanke and President Obama, the Dollar looks as if it could start to lose some of its luster as a safe haven economy. In my opinion the Dollar is beginning to look like the Yen was three months ago. In other words, now that the Japanese Yen has lost its appeal as a safe haven currency and traders are focusing on the Japanese economy, look what has happened to the Yen. Is this the fate of the U.S. Dollar over the next few months?
The Forex markets seem to like the U.S. Dollar when there is fear because they know the U.S. will keep throwing Dollars at the problem. The closer the U.S. economy gets to turning around however, the closer we get to a top in the Dollar. Once the fears go away and traders start to focus on the economy, it looks as if the U.S. Dollar will be crushed like the Yen.
President Obama announced his new budget today. The new figure is $3.55 trillion. This creates an estimated deficit of $1.75 trillion. There was a neutral reaction to this figure. Traders seem to be saying it is what it is. Traders just seem to be happy that there is going to be enough money available to help rebuild the economy. Some traders were concerned that programs would be slashed from the budget, but it looks as if plenty of money will be around to spend.
The Euro traded flat most of the day on Thursday. The up and down action in the stock market prevented traders from deciding to buy Dollars or Euros. Traders could not decide whether they preferred the safe-haven Dollar or the more risky Euro.
The EUR USD could be range bound for a week as traders await the next interest rate announcement from the European Central Bank. This cut is expected to be in the neighborhood of 50 to 75 basis points. Additional pressure could arise for the Euro if exposure to Eastern and Central European banks erupts.
The British Pound rallied after the announcement of a plan by the U.K. to guarantee toxic assets. This plan was talked about all week so it was probably already in the market. The new plan called the Britain Asset Protection Scheme is designed to offer insurance against huge losses to eligible banks.
The unveiling of this plan came on the same day that the Royal Bank of Scotland announced the biggest loss in British corporate history. The vast majority of the blame was placed on exposure to toxic assets.
Traders seem to like the plan as it represents a new and fresh approach to dealing with the crisis. Speculators have expressed support for the Pound recently because of its proactive approach to reviving the economy through interest rate cuts and stimulus plans.
The USD JPY continued its strong upside move as it neared a major 50% retracement price at 98.87. As mentioned earlier in the week, the Japanese economy seems to be on the brink of a meltdown. The Bank of Japan has been noticeably quiet, which is not a good sign. The new Finance Minister has only been on the job for about a week so he cannot take all of the blame. It's a tough situation to deal with because the economy is so reliant on exports. If the two biggest buyers - the U.S. and China- are going through recessions then it may take a long time before the Japanese economy will show any sign of recovery.
With nowhere to go with interest rates, the Bank of Japan is going to have to get more aggressive with its stimulus. So far all I have heard is that it is going to buy Japanese stocks. The BoJ has to make a decision to save the economy or the Yen. The decision is easy - save the economy. This means the enactment of a plan of quantitative easing. In other words, do not just buy stock, but flood the market with cash.
If the U.S. Dollar begins to lose its luster as a safe haven currency then the Swiss Franc is likely to be the beneficiary whether the Swiss National Bank likes it or not.
Swiss investors may start to repatriate because of the low yields in the U.S and because of the lingering anger over the UBS tax scandal. Technically, the USD CHF looks overbought. The problem is 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. This means that the Swiss Franc may go nowhere if buyers try to push the market higher while the SNB tries to prevent a rise.
The Canadian Dollar showed some strength on Thursday after Canadian banks showed profits and crude oil surged. News that Canadian banks showed a profit was welcomed by bullish traders after they feared the U.S. banking system problems had spilled over the border.
The strong surge in crude oil helped revive images of a recovery in the Canadian economy. Although it may take a while for crude oil exports to recover from the slowdown in demand, the news that OPEC members are complying with the production cuts is a sign that the trend may be turning in oil prices.
Higher crude oil prices could not help the AUD USD as traders instead decided to focus on the stock market. The inability of the stock market to follow-through to the upside after Wednesday's rally shows that trader appetite for risk is still waning. Until investors commit in a big way to owning higher risk assets, continue to look for more downside pressure.
The NZD USD felt downside pressure on Thursday as trader appetite for risk waned as the stock market weakened. The New Zealand Dollar is under pressure for two reasons. The first is the lack of desire to hold higher-yielding and higher-risk assets. The second is the poor economic outlook. As long as the global economies are going through recessions, demand for New Zealand exports will be down. Unless the sentiment shifts toward bullish for stocks, look for more downside pressure.
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