Trend taking U-turn as major currencies struggling while CAD gaining heights

Greece is currently negotiating the details of an emergency joint rescue package from the euro zone and International Monetary Fund.

The Greek government has said it wants to reduce the deficit to 5.6% of GDP in 2011 and 2.8% of GDP in 2012. But spending cutbacks measures being introduced by Athens to restore its finances are being resisted. Yesterday tens of thousands of Greek civil servants staged a 24-hour strike in protest against the austerity measures.
The Bank of Canada yesterday continued to keep financial markets guessing about when policy rate increases may begin, but said their time has come. Likely dates are June 1st or July 20th for the first of a series of increases.

Canada’s dollar traded near a 22- month high against its US counterpart in the forex online market as the central bank signaled an increase in interest rates and reiterated that the need for economic stimulus is fading. The currency hit a high of CAD 0.99606 before dropping back to close just below parity at CAD 1.00061.

The Bank only provided detail in a Monetary Policy Report to outlines given Tuesday when it maintained the year-long rock-bottom overnight rate target at 0.25%. It said the need for such extraordinary stimulus is over and it is time "to begin to lessen the degree of monetary stimulus." However, the timing and size of rate increases "will depend on the outlook for economic activity and inflation." And here, on economic activity and recovery from recession, the Report is laced through with cautions.

Inflation is expected to remain anchored at around the 2% target through 2012, with the Bank evidently little concerned about it. Looking at growth, though there was a strong 5.8% recovery in the first quarter of this year, and 3.8% expected GDP increase in the present quarter, this recovery is "front-loaded," the Bank says. Growth will diminish to 3.5% in the second half and more rapidly in 2011, down to just +1.9% in the two final quarters of next year.

From now on, Canadian growth "will revert more quickly to trend," in the Bank's assessment. From the present second quarter this year through all of 2011, growth slows because policy stimulus measures had brought forward "considerably more expenditures" late last year and early this year than expected. Moreover, the Bank expects "a somewhat weaker outlook for US economic growth starting in the second half of 2010." Another drag is "the higher assumed level for the Canadian dollar."
The Bank bases its assessments in part on a Canadian dollar averaging 99 cents against the US dollar over its projection period (through 2012). The Canadian dollar was at parity with the US dollar Wednesday.

On an average annual basis, Canadian GDP is expected by the Bank to grow by 3.7% this year, against just 2.9% expected in the January Monetary Policy Report. Then, growth slows gradually to 3.1% in 2011 (3.5% expected last January), and down to 1.9% in 2012.

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Stress Test Results in Adding Just More Stress

Rumor has it that US Regulators have told the two largest US Banks, Citgroup and Bank of America, that the results of their "stress test" show that will require further capitalization. What this means in simple terms is that the banks are not ok - they have so much debt, bad debt at that, and they are in need of more money to help them stay afloat.

We all knew that Citigroup was a zombie bank, a bank that is dead, bankrupt, kaput, but is being sustained by the generosity of the US taxpayer (with the help of the Chinese treasury Bill holders, of course). But after the results of Treasury Secretary Tim Geithner's test on bank stability - aka The Stress Test - we are witnessing the fact that the US has no intention of following through on their plan to fix the banking sector. It was said that the results will determine the fate of the banks - if they show that they are in fact needy of further capitalization, the US would either systematically disassemble the banks in an orderly manner, or let them fail outright.

The problem is, when the plan was announced, if you remember, it was amidst much criticism that the US did not really have a plan - that they were being too soft on banks with severe problems for fear that their bankruptcy would cause a panic. So Geithner came out with the stress test idea and said that banks that do not pass, will be reorganized (A nice way of saying taken over). But now the outcome has changed - and it seems that the US banks that are at the heart of this whole credit mess will be getting more money to run their failing operations. It looks like the whole plan was to get these results out AFTER President Obama's first 100 days, the yardstick that sets the tone for the presidency.

Is it not ironic that these results were planned for Obama's 101st day?

Wednesday looks like it is shaping up to be a tough one for the US Dollar as risk appetite returns for a bit. I call it profit taking - it will be short lived.

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Watch out: Dollar in a very erratic trading session | The Euro ended the week with one of its best weeks since the end of 2008 | The Sterling gained

USD

The dollar gained against the Euro and a host of other currencies on Friday in a very erratic trading session. As the vibe in the stock markets turned negative, investors returned the greenback as a safe haven. The equity markets had been sharply positive all week long, with US markets gaining roughly 9%, Forex investors had taken the opportunity to test their risk appetite, however Friday seemed to indicate a migration back to the US Dollar.

The Dollar did erase early losses brought on by gains in stocks after decent economic data and hints that the US banks might not be as bad off as everyone thinks. Online Forex nalysts believe that the recent rally here for the USD against the Euro is all about the stock market. Investors are trying to gage whether or not the downslide in the economy is nearing a bottom – at this point, any good news can spur a rally. But the rallies are short lived because the sentiment is still quite negative.

At Friday’s close, the Dollar was up .15% to the Euro to 1.2926, up .3% to the Japanese Yen at 97.98, and unchanged versus the Swiss Franc at 1.185. The Dollar did fall to the Aussie and Kiwi, closing down ½% to the AUD to .6579 and down nearly 1% to the NZD at .5248.

EUR

The Euro ended the week with one of its best weeks since the end of 2008. Much of the gains the Euro made this week were based on investors testing their risk appetite, as stated above, however news from European Central Bank executives also played a part in the Euro’s rebound. Last week, several ECB board members declared that the crisis was being managed more aggressively and that a light at the end of the tunnel is in sight.

The Euro closed up ½% to the Yen to 126.68, up .16% to the Swiss Franc to 1.5321, down .4% to the Australian Dollar at 1.9641 and down .35% to the Canadian Dollar to 1.6441.

GBP

The Sterling gained widely on Friday as investors appeared to be giving the battered UK currency a break on Friday. Much hype of the UK’s bank bailout plan and overall negative sentiment about the state of the British economy has kept the Pound down in recent weeks. As investors retreated from more risky positions on Friday they appeared to find value in the Sterling.

The Pound closed up ½% to the dollar closing at 1.4 flat and up .3% to the Euro at .9231, up ¾% to the Yen at 137.18 and up ½% to the Swiss Franc to 1.6591. The Pound did fall slightly to the Canadian Dollar to 1.7803 and to the Australian Dollar to 2.1271.

ChartAnalysis: USDCAD

The recent inability of the USD/CAD to stay firm above the 1.30 level coupled with significant tension in the fundamentals has put pressure on the currency pair. The rising trend line looks like the next key support level below the 1.2675 line of support. Another way to play for a stronger CAD is with a CADCHF or EURCAD trade. USDCAD will need to see 1.2950 again to give bulls renewed hope here....

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