The EUR USD fell to a new low for the year fueled by ECB President Jean-Claude Trichet’s comments regarding the future of interest rate cuts. In his commentary following the announcement that Euro Zone rates would stay unchanged at 4.25%, Trichet noted that policymakers discussed cutting interest rates to stimulate growth. Trichet also acknowledged that the Euro Zone economy was slowing down by stating that recent data suggests "increased downside risk."

The markets responded to his comments with selling pressure. The aggressive selling was strong evidence that traders are speculating interest rates will be cut. To many it’s not a question of if rates will be cut, but when, as the ECB has a couple more meetings before the end of the year. Traders are increasing bets for a cut in both November and December.

Concerns are also mounting that a few European financial institutions will fail. Germany has taken steps to create a fund to rescue banks if necessary. Many feel the spread of toxic loans from the U.S. will continue to weaken European banks over the near term unless something is done similar to the moves by the Fed. Credit is still tight as banks continue to hoard the U.S. Dollar for liquidity, but refuse to lend it out. The situation is so bad in Europe that even a contraction in manufacturing in the U.S. in September was not enough to trigger weakness in the Dollar. Euro traders have shown no signs of buying interest even as U.S. Fed Fund traders show a 47% chance that the Fed will cut its key lending rate to 1.5% from 2.0% by the end of the year. Although the market is nearing technically oversold levels, the trend is still pointing down. Continue to press this market lower or look to sell a short-covering rally.

The GBP USD continued to weaken on Thursday after the release of a report showing U.K. home prices had dropped in September. On Thursday the Nationwide Building Society Report showed that the average price of a U.K. home plunged 12.4 percent from a year ago. This report is strong evidence that that Bank of England is going to have to lower interest rates at its October 9 meeting. For months the BoE has stood its ground on cutting rates to stimulate the economy, instead betting that the economy would pull itself out of the hole. However, the worsening housing market coupled with the possibility of bank failures is putting too much pressure on the BoE to act right now and cut rates. Although the BoE is offering emergency relief where needed, this action has not been strong enough to stimulate the economy. In addition, credit is too tight for any growth to develop. Look for more downside pressure as the flight to quality buying in the UK Gilts is indicating rates that will be cut on October 9.

The USD JPY fell on Thursday as nervous stock traders, fearing that the House will not pass the banking rescue plan, exited long positions and established new shorts. This action forced aggressive traders to sell Dollars to pay back loans taken in Japan. The lack of confidence in the U.S. financial system is once again triggering flight to quality buying in the Yen as traders dump potentially higher yielding assets. The direction of the USD JPY depends on the equities markets. Confidence has to be reestablished in the U.S. financial system as well as the U.S. stock market before this pair will rally. Tomorrow’s vote by the House on the U.S. banking rescue plan will dictate the direction of the Yen.

The USD CHF posted a slight gain on Thursday in mostly technically based trend buying. This market basically ignored the break in the stocks which is an indication that traders are focusing on the technical aspects of this pair rather than the carry trade. Fundamentally, a report earlier in the week showed that Swiss manufacturing contracted for the first time in three years. This may have contributed to the rally in the USD CHF as it is a sign that Swiss economic growth is slowing. The USD CHF is nearing a top at 1.1417. There may be a technical bounce at this level on the first test. If the U.S. stock market continues to weaken then it may hit a point in the decline when traders will use the Swiss Franc as a safe haven. This means longs should be careful if the USD CHF is testing 1.1417 while the stock market is breaking. The most bullish sign will be a rally in stocks and a breakout to the upside through 1.1417.

The USD CAD showed strength on Thursday on reports that the Bank of Canada is considering an interest rate cut in anticipation of a U.S. recession. The key evidence is the strong rise in Bond prices. Since Canada’s economy is closely linked to the U.S. economy, many traders feel that the U.S. will drag down the Canadian economy. The Bank of Canada is expected to preempt this economic decline with an interest rate cut on October 21. Lower commodity prices in the gold and crude oil markets are also weakening the Canadian economy. Gold and crude account for a large portion of Canadian exports. Look for the uptrend in the USD CAD to continue through the old main top at 1.0820.

The AUD USD made a new low for the year on Thursday. This market is feeling pressure from the global economic weakness, lower commodity prices and the lack of interest in higher-yielding assets. Traders are dumping Aussie Dollars because they feel the U.S. banking rescue plan will send the U.S. economy into a deficit-induced recession. This will likely trigger a global recession and lead to lower interest rates in Australia.

Bad news for global growth is putting downside pressure on the NZD USD. Traders are selling New Zealand Dollars because they anticipate a recession in the U.S. will trigger a global recession. Commodity prices - especially gold - have been falling. This is also hurting the demand for New Zealand Dollars. Although interest rates are among the highest in the world, fear and a tight credit market is tempering the demand for these higher-yielding assets. Look for more downside pressure as the weak economy may encourage talk of an interest rate cut.
 
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