The U.S. Dollar posted a strong gain after bearish economic reports Friday morning triggered a massive sell-off in U.S. equity markets. Investors were encouraged to dump higher yielding assets for the safe haven Greenback. Two different reports indicated a drop in consumer spending and sentiment. U.S. Personal Income was flat but Personal Spending indicated that consumers are still paying off debt and saving their money. The drop in the Michigan Sentiment showed that consumers are still uncertain about the economy mainly because of fear of losing their jobs.
All of the currencies that moved higher on the bullish U.S. Third Quarter GDP Report on Thursday gave back their gains. Some even exceeded Thursday's lows as selling momentum was strong all day. This reaction the day after the GDP Report proves that investors have put this report behind them and are now looking at the future of the economy. Friday's reaction shows that investors are worried that without government and Fed stimulus, the road to recovery will be rough.
Next week investors will have to deal with a Fed FOMC meeting and the Non-Farm Payrolls Report. Investors expect the Fed to change the language of its statement to indicate that a hike in interest rates may be coming sooner than expected. The Non-Farm Payrolls Report should show an increase in jobs lost and an unemployment figure close to 10%. A worse than expected report will make investors question whether the economic expansion during the 4th Quarter will be able to meet the 3rd Quarter number.
The EUR USD finished the week lower after posting a new high for the year on Monday. This closing price reversal formation indicates the start of a 2 to 3 week break. The GBP USD finished the week on the downside after showing strength earlier in the week. Traders are speculating that the Bank of England may increase or extend its asset purchase program. Earlier in the month it was reported that the U.K. economy had contracted. The stronger Dollar and weaker gold put pressure on the Swiss Franc all week. The USD CHF has been strong since it was reported that the Swiss inflation rate rose within target.
The USD JPY finished lower for the week as a shift in market direction caused Japanese investors to repatriate funds. Late in the week it was announced that the Bank of Japan will end its corporate bond buyback program. This sent a message to investors that the BoJ is getting ready to end its stimulus program. The sell-off in the USD JPY changed the trend to down on the daily chart. Downside momentum indicates that this market may see a retest of 88.00 over the near-term.
Commodity currencies finished the week lower as demand for higher yielding assets fell sharply when the Dollar rallied. The AUD USD changed the trend to down on the daily chart while downside momentum is indicating further weakness should be expected. A weaker than expected Aussie inflation number took the wind out of the recent rally early in the week as it sent a message that the Reserve Bank of Australia would not hike rates by 50 bp as speculated. Traders who had been bidding up this market in anticipation of an aggressive rate hike were forced to pare back their positions.
The NZD USD at first weakened in sympathy with the Aussie Dollar, but drew selling pressure of its own when the Reserve Bank of New Zealand decided to leave interest rates unchanged. In addition, it said in its statement that interest rates are not likely to rise until mid-2010. The drop in commodity prices this week also contributed to the weakness as it indicated that New Zealand exports may be down during the 4th quarter.
Weaker equity and crude oil prices helped contribute to the strong surge in the USD CAD. For weeks the Bank of Canada had been talking the Canadian Dollar down. It feared that a strong Canadian Dollar would be detrimental to the economic recovery. The combination of the "verbal intervention" and lower demand for higher risk assets should continue to support the strong rally in the USD CAD next week.
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