Two announcements, one by the U.S. Federal Reserve and the other by the Treasury, rocked financial markets toward the close of the previous week and before the opening of this one. The two announcements had drastically different effects on the forex trading market, although the end result was the same. What the long-term effects of these announcements shall be, however, remain to be seen.

The first announcement was the intensification of quantitative easing by the Fed. The financial markets have long expected such a move from Mr. Bernanke, but the sheer size of the sums involved startled traders and shook market confidence, and the immediate effect was to weaken the U.S. dollar against most major currencies. In the case of the Swiss franc, USD/CHF lost all the gains forced upon it the previous week by the Swiss National Bank, plus a bit (it’s currently bouncing from its MA-200 on daily charts, consolidating before its next move).

Treasury Secretary Geithner’s subsequent announcement, of a plan to remove toxic assets from banks’ balance sheets, received a more problematic reception. Greeted at first with stock market rallies in bourses from New York to Shanghai, by the time opening rolled back around to London on Tuesday morning, 24 March, the mood had become more cautious and dealers were heard discussing the storm clouds remaining on the financial horizon even if the plan worked—which of course is not guaranteed.

The promise of positive action nevertheless outweighed gloom, risk aversion waned at least for a time, and the VIX volatility index eased to 42.93 from 43.24. USD continued moving lower against major currencies; however, this time the driver was not USD weakness but a return to more normal forex trading market operations and even some resumption of the carry trade, visible in the inverse correlation between the Japanese yen and equities gains.

The big moves were made by the commodity currencies. The Australian and New Zealand dollars rose for ten consecutive days, with AUD/USD holding briefly above 0.7000 and NZD/USD rising as high as 0.5744 before both closed lower on Tuesday’s waning risk appetite. AUD/JPY rose to the top of its established trading range, between support at 55.50 and resistance at 69.50. USD/CAD retreated from the 1.3000 level and USD/JPY recovered much of the ground lost the previous week, although a series of four lower highs and three lower lows, visible on four-hour charts, indicate that not all of the downward pressure has dissipated for that currency pair. EUR/JPY rose, held, and closed above strong resistance at 130.61.

The state of market confidence achieved by these two announcements is fragile and could be shattered by any future negative developments in financial markets. Two event risks on that horizon are the 1Q2009 earnings reports, particularly those from financial institutions, and the results of the U.S. Federal government’s “stress tests” for major banks, both of which will be released in April. Should either of these event risks shatter that fragile confidence, a return to risk aversion forex trading—safe-haven currency strength despite fundamental or technical factors—could easily occur. Traders are also reminded that the Japanese fiscal year ends 31 March and repatriation flows could strengthen the yen before that date.