Trichet Comments Spark Selling in Euro
The Euro started the overnight session lower because of continued flight-to-safety selling as risk averse traders were seeking safety in the U.S. Dollar. Furthermore, news that the Euro Zone economy was expected to worsen was helping to drive the Euro lower. Bearish traders were also reacting to the possibility of a European Central Bank rate cut to under 1% in May and simultaneous quantitative easing in the form of corporate buy-backs.
The market reversed itself to the upside prior to the New York opening on short-covering following the announcement that Wells Fargo bank was going to post earnings better than the Street had estimated. This news triggered a short-covering rally similar to the move last week.
By the end of the day, sanity returned to the Euro market as traders, realizing there was no solid economic evidence supporting the rally, decided to square up positions ahead of the long Easter holiday weekend. Adding further to the late session decline were comments from Euro Zone President Trichet who said European Central Bank rates had room to fall and that the ECB was considering nonstandard means to stimulate the economy.
Given the weak close on thin market conditions the Euro is likely to get hit hard next week when the trade returns to normal.
The British Pound opened under pressure but quickly turned around when trader appetite for risk increased following a huge turnaround in U.S. equity markets. Stock markets were reacting to the positive guidance of Wells Fargo which stated expectations of better than expected earnings. The rally in equities led traders away from the safety of the Dollar and into more risky currencies.
By the end of the trading session investors sold the GBP USD ahead of the long holiday weekend. Earlier in the morning the Bank of England put pressure on the British Pound when it announced no change in its interest rate policy but declared that the economy was weak enough to require additional rounds of quantitative easing in an effort to increase the money supply and prevent deflation.
The current situation looks as if there is going to be a showdown between short-term investors reacting to an appetite for risk-driven scenario and long-term investors who are watching the continuing decline in the economy. Look for longer term traders to win the battle as the chart pattern suggests more room to the downside.
The Canadian Dollar closed higher for the session as bullish traders chose to ignore the possibility of another interest rate cut and the introduction of quantitative easing by the Bank of Canada later this month. Both of these factors had been putting downside pressure on the Canadian Dollar along with weakness in equity and crude oil markets.
Recent losses have been limited lately by gains in industrial metals such as zinc, copper and aluminum. These gains have neutralized the weakness in the crude oil and have given the Canadian export market a welcomed boost.
The strong surge in U.S. equity markets because of positive guidance from Wells Fargo helped support the Canadian Dollar in Thursday's New York trading session. Since equities, crude oil and industrial metals are all heating up there is the possibility of the start of a sustained rally from current levels. It all depends on key export demand remaining constant. This was proven today when an unexpected rise in trade surplus helped sustain early morning gains.
The strong surge in U.S. equity markets on Thursday led to renewed trader appetite for risk. This of course is increasing the selling pressure on the Japanese Yen. Some of the weakness is related to the poor performance of the Japanese economy and some to Japanese investors selling Yen and chasing a better yield elsewhere. The strong rally in the equity markets is also leading to renewed interest in the carry trade.
The Bank of Japan and the Japanese government are expected to announce plans for a new more powerful stimulus plan on Friday. Traders having seen stimulus plans in the past fail seem to be willing to take a wait and see attitude toward this announcement before reacting.
Most traders feel that the key to reviving the economy does not lie in stimulus plans but in increased demand by Japan's largest trading partners. This is not likely to occur until the economies in the U.S. and Europe start to show improvements.
The Swiss Franc remained under pressure on Thursday despite renewed trader appetite for risk. Investors have been shorting the currency since the appointment on April 8 of Philipp Hildebrand as the new leader of the Swiss National Bank. Traders are reacting negatively to the news because he is expected to continue the SNB policy of limiting Swiss Franc appreciation. Over the last month the SNB has embarked on a campaign to weaken the Franc in an attempt to encourage foreign demand for Swiss exports. Although quantitative easing has been used at times, its primary weapon has been intervention.
News that the recession is triggering an increase in corporate bankruptcies has also been hurting the Swiss Franc.
Since cutting interest rates to near zero, the SNB has limited its ways to stimulate the economy. Therefore continue to look for the SNB to attempt to influence the price of the Swiss Franc through 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 strong rally in U.S. equity markets due to the better than estimated earnings expected by Well Fargo bank helped to support the AUD USD. Once again trader appetite for risk helped support this market which should keep the rally intact over the short-run but eventually the economy is going to have to show signs of improvement or this currency will break.
The Reserve Bank of Australia has suggested that it is not finished cutting interest rates if the economic conditions don't improve so traders may begin to approach the long side of this market with caution. At this time traders are enjoying a strong rally based on optimism that the U.S. economy is recovering but eventually this recovery has to show up in improved Aussie export numbers.
The New Zealand economy is facing similar issues as the Australian economy. The economic numbers just don't support this current rally but none-the-less the increase in trader appetite for risk is helping to drive the NZD USD higher.
Traders have to be cautious when this market approaches resistance levels because there is always the possibility that reality will set in and sellers will emerge.