FOMC Minutes Indicate U.S. Dollar Likely to Remain Strong
Wednesday's release of the minutes from the March FOMC meeting showed growing concern by members that the U.S. economy would experience a steep drop in activity into 2010. In the report the Fed highlighted a much grimmer outlook for employment, worsening corporate earnings, and weak trade data as the main reasons to believe the recession would last into next year.
Concerns were expressed for both the domestic and overseas economies. These concerns were most likely based on reports showing the recessions deepening in the United Kingdom and the Euro Zone.
Based on this new data, the outlook for the U.S. Dollar is bullish as traders are likely to maintain their appetite for lower-risk, lower-yield assets until there is concrete evidence that the U.S. economy has bottomed. This week the Dollar renewed its stance as the world's reserve currency following pessimistic comments regarding the U.S. financial system which encouraged investors to bail out of equity markets.
The recommendation is to sell rallies in the Euro as newly released economic data showed that the recession affecting the Euro Zone economy is deepening. Exports are falling, driving this economy even further from a recovery while concerns are mounting as to whether new banking problems will arise from weaker European Union member nations.
Investors are questioning the lack of aggressive activity by the European Central Bank to combat the growing recession. Many feel that the inability to cut interest rates to close to zero and the lack of an aggressive stimulus plan are the key reasons why the Euro Zone economy is beginning to lag the rest of the world
News that the U.K. economy contracted 1.5% during the first three months of the year weakened the British Pound on Wednesday. Traders are becoming concerned that the inability of the Bank of England to get the economy back on track is likely to lead to more aggressive quantitative easing which would put more downside pressure on the currency. Furthermore, investors fear that too much quantitative easing - which is basically the printing of money - may lead to uncontrolled inflation.
The chart pattern suggests that the GBP USD is vulnerable to the downside. It looks like all it is going to take is a string of bad economic data to drive longs to the exits and trigger sell stops.
The Japanese Yen posted a gain against the U.S. Dollar as Japanese investors continued to repatriate Yen in an effort to get out of higher-risk assets purchased while there was still optimism in the global economy.
The loss in the USD JPY is just further evidence that the global investing community believes that risk appetite will remain low as long as global corporate earnings remain down, unemployment remains high and there exists the possibility of a financial system collapse due to toxic assets.
Traders remain pessimistic about the Japanese economy at this time, but are unwilling to continue to pressure the Yen ahead of the release of major stimulus plan by the Bank of Japan on Friday. Although traders are waiting for this new stimulus plan, many feel it will not be enough to start a recovery. The majority of bearish traders most likely believe that the economy will not turn until the economies of Japan's major trading partners start to recover.
A rise in equity markets helped support the Canadian Dollar on Wednesday but the upside move was limited by weakness in commodities and uneasiness about tomorrow's Canadian unemployment report.
Traders are looking for a decline of about 55,000 jobs. This report is seen by many as a key indicator of just how bad the Canadian economy was during the first quarter. Many believe it doesn't matter how this report comes out because the Bank of Canada is already set to lower its benchmark interest rate to 50 basis points while simultaneously releasing a plan for quantitative easing. Look for the cut and the new plan on April 21.
The USD CHF rallied on Wednesday following the appointment of Philipp Hildebrand as the new leader of the Swiss National Bank. Traders reacted negatively to the news because he is expected to continue the SNB policy of limiting Swiss Franc appreciation. Since the middle of March the SNB has embarked on a campaign to weaken the Swiss Franc by purchasing foreign currencies in an effort to revive the export market.
The new appointment hasn't been the only factor driving the USD CHF higher. News that the recession is triggering an increase in corporate bankruptcies is also hurting the Swiss Franc.
Since the SNB can't cut anymore, look for it to continue to influence the price of the Swiss Franc through its intervention and by purchasing corporate debt. Both moves seem aggressive but the SNB is not only battling the recession, but also the threat of deflation.
The improvement in the U.S. equity markets helped to support the AUD USD. This lessened the effect of an interest rate cut by the Reserve Bank of Australia to 3%. Investors are expressing concerns that the RBA will continue to cut rates over the remainder of the year until the economy starts to show signs of recovery. Currently the only things driving this market higher have been the strong equity and commodity markets. If trader demand for more risk begins to erode then support for this currency will also decline.
Traders will get a clue as to just how weak the Aussie economy was during the last quarter when the Australian Unemployment Report comes out tomorrow. Traders are looking for an increase in jobs lost. This report is likely to influence the next move by the RBA.
Higher equity and commodity markets are also increasing trader demand for the higher yielding NZD USD. Without the strength in these two asset classes this currency would likely be much lower as there is nothing in the economy to indicate that a recovery is possible this year. A further indication of this line of thinking was the announcement that the government will abandon plans for a tax cut later this year. Since there is a recession and corporate losses are likely, it didn't make sense to pass along the tax cuts.