The U.S. Dollar closed lower against a basket of currencies as appetite for risk drove traders away from the lower yielding Dollar into the higher risk currencies.
The strong trend against the Dollar was set overnight when the Reserve Bank of Australia surprised most analysts with a 0.25% rate hike. A story then began circulating that a group of nations including Saudi Arabia and China had begun secret talks to replace the Dollar as the crude oil pricing mechanism. Traders reacted to both of these news events by selling the Dollar.
The move by the RBA sent a signal to the markets that the Asian-Pacific Region may be in a better position than the U.S. and Europe to mount a strong recovery out of the recession. In addition, some traders believe the Euro Zone is in better shape than the U.S.
The story about the Dollar being replaced as the main currency for pricing oil was denied by Saudi Arabia, but nonetheless should be a major concern for Dollar traders. So far the Treasury, the so-called “Defenders of the Dollar” has not made a comment, but their usual line is “we stand behind a strong Dollar.” This plan may take years to implement, but short-term traders reacted negatively to the news.
Demand for higher risk assets drove the EUR USD higher. The European Central Bank meets on October 8th. It is expected to keep interest rates unchanged and remains concerned about the economy. ECB President Trichet has been vocal recently about central banks maintaining their stimulus plans until the global economy recovers. Because of this stance, traders expect the ECB to continue to implement its stimulus programs.
The GBP USD continued to trade weaker. Today’s weaker than expected Factory Output Report weighed on the Pound throughout the day. Losses were most likely limited by the weakness in the Dollar. The Bank of England is expected to leave interest rates unchanged and its stimulus plan intact when it meets on October 8th.
Demand for higher yielding Japanese investments kept downside pressure on the USD JPY. The rally in the Yen seemed tentative, however, as traders are still nervous about the possibility of an intervention by the Bank of Japan. The BoJ has expressed concerns about abnormal price movement and excessive volatility. There should be no problems if the Yen increases at a steady pace driven by economic reasons.
Firm energy and stock prices helped boost the Canadian Dollar. Traders are betting that higher crude oil prices will help to improve the Canadian economy. Although this currency pair is trading in a range, Canadian officials are still concerned that a rapid rise in the Canadian Dollar will hurt the export market.
The Reserve Bank of Australia hiked its benchmark interest rate by 0.25% to 3.25%. This came as a surprise to most analysts who were looking for a December hike. This move didn’t surprise speculators who were showing signs of an impending rate hike yesterday. Today’s gains may be attributed to investors already pricing in another rate hike in December.
The NZD USD piggy-backed the move in the AUD USD today. The action by the RBA is sending a signal that the Asian-Pacific Region is in a recovery. This means a better economy for New Zealand. Although the Reserve Bank of New Zealand is on record saying that it would not raise rates until early next year, the move by the Aussies may force the RBNZ to move up its plans.
Local: 312-896-3930
Toll Free: 800-971-2440
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as “spread” or “straddle” trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.
