US Dollar, Japanese Yen Strongest of the Majors as DJIA Falls 2.34%

The Japanese yen was the strongest of the majors, while the US dollar was close behind, as jittery investor sentiment throughout the financial markets weighed on “risky” assets like high-yielding currencies and equities, with the DJIA ending the day down 2.34 percent. Other evidence of increased demand for “safe haven” assets included the $10.50 gain in Comex gold futures to $883.30/oz and slight gains in 2-year and 10-year Treasury notes. Looking at the data on hand, the Federal Reserve’s consumer credit report showed that financing use fell $7.5 billion during February, compared to a revised increase of $8.1 billion in January. The decline was led by a 9.7 percent drop in revolving credit, such as credit cards, from a year earlier while non-revolving credit, such as auto or student loans, rose a slight 0.2 percent from a year ago. Though this isn’t a very market-moving report, the data highlights the fact that the Federal Reserve’s efforts to loosen up credit conditions haven’t had a huge impact on the consumer end of the line, as there is likely a combination of less demand and availability by banks.

Looking ahead to Wednesday, risk trends could be shaken up following the release of the Federal Open Market Committee (FOMC) meeting minutes at 14:00 ET. In March, the FOMC left the fed funds target range at 0.0 percent - 0.25 percent but the big surprise was that they officially announced quantitative easing efforts. Since this information has already been revealed, the release of the minutes may not be very market-moving, but they will likely add to indications that the FOMC will leave the target unchanged throughout much of 2009 and that they will continue to use the central bank’s balance sheet in an effort to improve credit conditions. The one thing that may capture the market’s attention is the FOMC’s long-run projections for growth, unemployment, and inflation as revisions that indicate that the outlook appears to be even worse than previously anticipated could hurt risk appetite throughout the financial markets, and thus lift safe-haven currencies like the US dollar. However, if the revisions go unchanged, traders may shrug-off this once critical release.

Euro Under Pressure as Euro-zone GDP Revisions, ECB Member Comments Signal Further Rate Cuts

The euro was under pressure versus most of the majors on Tuesday, sending EUR/USD below key trendline support and EUR/GBP below its important 100 SMA as evidence continues to point toward another rate cut by the European Central Bank (ECB) and a move toward quantitative easing. First, the final reading of Q4 GDP was unexpectedly revised to a new record low of -1.6 percent from -1.5 percent, due primarily to downward revisions to gross fixed capital formation (capital goods investment) to -4.0 percent from -2.7 percent. Persistently declines in household spending and exports were also responsible for the weak result, as they fell 0.3 percent and 6.7 percent, respectively. Adding to the GDP figures, ECB Governing Council member George Provopoulos said during an interview that the bank’s benchmark rate could be cut by at least another 25 basis points, as he did not “see 1 percent as a threshold,” and that he would “not exclude that the ECB could go down further from this level if the economic environment deteriorates further.” All told, Credit Suisse overnight index swaps are only pricing in a 22.5 percent chance of 25 basis point cut to 1.00 percent during the ECB’s next meeting, but there is plenty of time for market expectations to shift ahead of that May 7 meeting.

British Pound Slips vs. US Dollar, Makes Headway Against Euro

The British pound was mixed against the majors, slipping against low-yielders like the US dollar and Japanese yen while gaining against the euro and the ultra-weak New Zealand dollar. A combination of risk trends and technical factors drove price action for the most part, but the fundamental picture remains decidedly bleak. UK industrial production failed to improve for the 15th straight month in February, as the index measuring output fell 1.0 percent led by declines in electricity, gas, and water supply output, though manufacturing, mining and quarrying, and oil and gas production all slipped as well. Ultimately, the month-over-month drops dragged the annual rate down to -12.5 percent, the lowest since record-keeping began in 1949, highlighting the impact of contracting domestic and foreign demand for UK-made goods. Nevertheless, the Bank of England is widely anticipated to leave the Bank Rate unchanged at 0.50 percent on Thursday, but the big question is whether or not they will signal an expansion of their quantitative easing efforts.

Australian Dollar Shows Muted Reaction to ‘Surprise’ RBA Rate Cut

The Australian dollar ended the day down 0.5 percent against the US dollar, but when you consider the news that came out overnight, it seems fair to say that the Aussie’s drop wasn’t actually that bad. Indeed, the Reserve Bank of Australia cut rates by 25 basis points to 3.00 percent, which was in line with what Credit Suisse overnight index swaps were pricing in but ran counter to the oft-followed estimates published by Bloomberg News. This was a divergence we noted yesterday, and while the announcement did initially trigger a 50 point decline in AUD/USD to a low of 0.7043, the pair eventually recovered and ended Tuesday above 0.7100 as RBA Governor Glenn Stevens’ policy statement suggested that they may pursue a neutral stance going forward since domestic interest rates are now “at very low levels by historical standards” and “there are tentative signs of stabilization in several countries, including China.” That said, as a relatively high-yielding currency, the Australian dollar still faces downside potential stemming from risk-averse selling of carry trades.

Terri Belkas is a Currency Strategist at FXCM.