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Economic Woes Could Trigger Sharp Break in Aussie Dollar

The Australian Dollar could be looking at a sharp selloff as signs are out there that investors are focusing more on the Australian economy than the higher yields offered by the market. Even the stock market rally on Wednesday could not encourage risk hungry traders to go after the higher yielding AUD USD. This is clearly a sign of developing weakness and is likely to trigger further downside pressure as traders are shifting their needs from return on capital to return of capital.

News that Australian inflation fell to 2.5% after a three month increase of 3.7% sent a message to investors that the Reserve Bank of Australia may be poised to take aggressive action to revive the economy. Expectations are for the RBA to do all it can to stimulate the economy including additional stimulus spending, quantitative easing or an intervention.

Last week's news that China's economy was contracting and that exports were falling is still casting a bearish pall on the Aussie. Wednesday's report that showed Japanese exports had fallen for the sixth straight month compounded the bearishness.

The fundamentals are pointing toward lower markets but the charts still indicate the market is in an uptrend. This means that in order to attract fresh selling pressure the AUD USD has to fail on the next retracement that tests the top at .7326.

The NZD USD is facing issues similar to the Australian Dollar. With the economy showing signs of weakness, investors know the Reserve Bank of New Zealand has to take action to prevent the on-going recession from deepening and widening. Most traders are calling for quantitative easing or an intervention as the best short-term solution. The RBA may cut rates again since they have room to do so, but the speed of the decline in the economy will most likely counteract a slow-moving interest rate reduction.

The New Zealand economy is reliant on exports, but the recent rise in the Kiwi caused by traders chasing higher yields, has made New Zealand goods too expensive. Furthermore, news that both China and Japan's exports were down is also an indication that demand for New Zealand goods will fall. The future does not look too bright for the New Zealand economy but things could turn around if China announces another stimulus plan.

The U.S. Dollar weakened versus the Japanese Yen on Wednesday. Traders were mixed in their opinion as to why the USD JPY fell. Some felt it was caused by flight-to-quality buying because of lingering U.S. banking issues. Others felt that although Japan's exports were down from last month, they were slightly better than last month. This news was interpreted as the start of possible bottoming action.

Smart money realizes that exports are still down and that the market is far from a recovery. This is why any substantial rally will be met with renewed selling pressure.

The Canadian Dollar closed lower today in a volatile two-sided trade. Several times throughout the New York session, the market traded on the plus side only to be met with selling pressure which drove it lower.

Traders seemed reluctant to take a major position ahead of an important Bank of Canada announcement report. On Thursday, the BoC is set to reveal its plans for quantitative easing. Traders are waiting to see the amount and duration of the new plan. In addition, the BoC is expected to reveal the means to stimulate the economy.

Traders know the method will be unconventional but aren't sure if it will be accomplished through the purchase of sovereign debt, corporate debt or bank securities.

The news that the U.K. budget deficit would soar to 175 billion Pounds encouraged selling pressure all day in the GBP USD. Not only was the deficit a massive amount, but it accounted for 12% of the GDP. The addition of a new 50% tax for high earning individuals added additional selling pressure to the market. Why the government would create a new tax at a time of economic contraction befuddled traders most of the day and no doubt led them to pile on the short side of the market.

 

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