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Weekly Forex Wrap-up
Month End Video Commentary: [url]http://brewer.acrobat.com/p68124319/[/url] To attend a complimentary webinar covering trend line analysis next week given by Jay go to: [url]http://www.brewerinvestmentgroup.com/email/jnorriswebinarevent112608/jwebinarlanding.htm[/url] Appetite for Risk to Dictate Short-Term Direction for the U.S. Dollar The weakness in the Dollar this week began when the U.S. became the world’s largest hedge fund after rescuing Citigroup. The Fed and U.S. Treasury essentially caused the United States to become a hedge fund when it ponied up a mere $20 billion to control $306 billion in toxic assets. No one in the world gets this kind of leverage. This news encouraged traders to seek higher yields outside of the United States as it brought renewed confidence to the global equity markets. Traders now believe that the Fed and U.S. Treasury will not allow any large financial institutions to fail. However, the fact that another financial institution may be vulnerable is causing Forex traders to believe that the Dollar should not be treated like the safe haven investment it has become over the last six months. U.S. Government reports brought more bad news to investors. Economic reports showed that durable goods dropped close to double the forecast and consumer spending continued to fall. All facets of the housing industry are also continuing to fail as housing starts, sales and prices dropped to multi-year lows. Of course Third Quarter GDP confirmed what the rest of the markets had been telling us. The news confirmed that the economic contraction is expanding wider and deeper. More economic stimulus was provided for floundering U.S. credit markets this week. On November 25, the Fed and U.S. Treasury announced a new $800 billion plan to provide more credit to homebuilders, consumers and small businesses. The government is attempting to unlock the credit markets by guaranteeing mortgages, auto loans, credit card debt and school loans. China took another shot at reviving its sluggish economy by slashing interest rates this week. This comes only weeks after unveiling a more than $500 billion plan to stimulate its economy. Not only is the plan expected to help rebuild Chinese infrastructure, but it should provide some relief to nearby ailing Asian nations. The Forex markets did not seem too excited by the news from China. Some traders believe that the Chinese economy may be weaker than the leadership has been willing to reveal. Finally, the European Union jumped into the economic stimulus game with a plan of its own. On November 26, it announced the creation of a plan to help the economies of 27 European nations. Traders believe that this plan may be an unnecessary expense because European Central Banks had already provided stimulus plans of their own. Overnight the news that Europe’s inflation rate fell by the most in almost 20 years is leading to speculation the European Central Bank will cut interest rates by as much as 75 basis points on December 4. Lower inflation and falling employment is giving the ECB room to cut. ECB President Trichet seems dovish going into the meeting. This week he warned of "negative growth" next year in the Euro Zone. Another ECB Council member named Nowotny appeared a little hawkish when he said the ECB should hold back some "firepower" and show some restraint toward aggressively cutting interest rates. This contradiction in policy put a lid on the Euros’ gains this week. The GBP USD posted a strong percentage gain for the week. This came after the news that consumer confidence in the U.K. fell by less than forecast. Gains in the stock market also encouraged investors to buy the British Pound to satisfy their demands for risk. Traders are anticipating a rate cut by the Bank of England of up to 100 basis points at its next meeting on December 4. The strong rally in this pair this week is a sign that investors are gaining confidence in the Bank of England’s strategy of economic stimulus and aggressive interest rate cuts to help accelerate the U.K. recovery from the recession. The up move in the British Pound could also be read as a sign that traders believe that the U.S. economy is going to get worse before it gets better. Higher global equity markets and a stronger demand for higher yielding assets could put pressure on the Japanese Yen over the short run. Traders are once again renewing interest in the carry trader which encourages borrowing in Japan and investing in the U.S. The Swiss Franc showed signs of life this week. Weaker U.S. economic reports and demand for higher yielding assets weakened the demand for the U.S. Dollar as a safe haven investment. New financial bailout plans have the potential to weaken the U.S. financial markets even further and this news is encouraging traders to pull money out of the States and back into Switzerland. Longer term, this currency is still expected to feel pressure from the recession in Switzerland and in the neighboring Euro Zone. The USD CAD is beginning to firm up because of expectations of higher commodity prices. The rally in gold has had the biggest influence on the Canadian Dollar. Higher commodity markets are needed to boost the Canadian economy. The Bank of Canada supplied liquidity to the system this week. This may mean its economy is starting to show some cracks. Slow growth and lower inflation is leading traders to believe the Bank of Canada will cut rates by as much as 50 basis points on December 16. A stronger stock market should help increase trader appetite for risk and boost prices of the AUD USD. As long as the stock market and commodity markets can remain stable, look for the Aussie to continue to work higher. Traders have gained confidence in the Australian Dollar because of several rounds of intervention by the Reserve Bank of Australia. These interventions have helped establish a strong support base. Watch for a possible breakout over .6693. If this occurs, the trend will change to up. The NZD USD has been finding support recently because of stable agricultural commodity markets and bullish precious metal markets. Higher commodity markets are necessary to stabilize the News Zealand economy. A pick-up in trader appetite for risk should also help boost the NZD USD as traders will seek higher yielding assets in New Zealand. The chart clearly shows the link between stock prices and NZD USD. If the market can maintain this relationship then a rally in stocks is likely to pull up the New Zealand Dollar. Please do not hesitate to contact us at 1-800-971-2154, with any questions. 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