Forex markets offered little clues as to what to expect from the FOMC tomorrow as trading was relatively light. The British Pound and Euro seemed to shut down as traders took time out ahead of tomorrow’s FOMC announcement. The Japanese Yen and Canadian Dollar traders decided to focus on the action in the U.S. equity markets.
Japanese Yen traders shrugged off discouraging news by the Bank of Japan and instead focused on the U.S. equity markets for direction.
The BoJ offered no support for the Yen following a rather pessimistic outlook for the Japanese economy. Japanese interest rates were kept at historically low levels while the BoJ felt that a turn around in the global economy would not have a significantly strong effect on the Japanese economy.
The commentary from the BoJ was really no surprise. Investors had been expecting this sort of news given the recent Japanese economic data. Traders chose today to focus on the U.S. equity markets for direction.
The weak stock market drove Japanese investors out of higher priced assets and into the lower yielding Yen. Speculators who had borrowed in cheaper Yen to invest in U.S. equity markets also sold stock positions to pay back loans.
The GBP USD traded mostly sideways today as traders were reluctant to commit to a sizeable position ahead of tomorrow’s FOMC meeting. Last week’s news by the Bank of England is still weighing on this market. Technically, the developing pattern is bearish with the charts indicating substantial room to the downside.
The Euro also traded in a tight and narrow range on light volume. Traders seemed to be taking a break following two days of weakness. Stronger than expected U.S. economic numbers are pressuring this market. Traders believe that the U.S. economy is in a better position to mount a recovery before the Euro Zone.
The USD CAD continued its strong rally. Investors are beginning to believe that the Canadian economy may not be as strong as the recent rise in the currency suggested. Last week’s worse than expected Canadian unemployment number was a sign that there may be economic issues brewing. Traders are now beginning to realize that the recent rally may have been driven solely by demand for higher risk assets rather than sound economic fundamentals.
Diminishing demand for higher yielding assets helped pressure the NZD USD and AUD USD on Tuesday. Although these two currency pairs are still in an uptrend, there is mounting evidence that a break in U.S. equity markets will send these markets sharply lower. The current chart pattern suggests that both the Aussie and the Kiwi are in positions to break at least 50% of the recent rally.
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