The EUR USD fell to a new low for the year, in effect wiping out the $1 trillion bet placed by the European Union over the week-end. Now that the short-term fix has been eliminated by the market action, the downtrend can resume its normal course. It looks at this point like the EU and IMF are out of bullets so buckle your seatbelt. The European Central Bank may try to get creative by slashing interest rates to zero, but this move is likely to wear off quickly as it would indicate that it expects the Euro Zone to show no growth over the near-term. Thursday’s downside action also demonstrated that the hedge funds and large traders remain fearless.
The GBP USD traded sharply lower on Thursday after breaking through a short-term retracement zone at 1.4763 to 1.4695. Earlier in the week, the British Pound rallied following the announcement of the formation of a new government. Reality set in rather quickly shortly after this event as investors began to realize that austere financial measures will be necessary to cut the budget deficit and reduce the sovereign debt. On Wednesday the Bank of England announced that economic growth will be slow over the next two years. This news also pressured the British Pound. Downside momentum appears strong enough to drive this market into last week’s low at 1.4474
The weaker Euro helped to boost the USD CHF. The current chart formation suggests that the new low in the Euro is likely to lead to a breakout to the upside through the recent top at 1.1246. A new main bottom has been formed at 1.0923. A trade through this price will turn the main trend down.
Weaker equity markets and the fear that the problems in the Euro Zone will slow down economic growth helped to pressure the USD JPY. Traders shed higher risk assets most of the trading session driving investors into the safety of the lower yielding Japanese Yen. It now appears that the Dollar/Yen is likely to remain under pressure until either the U.S. begins to raise interest rates or normal demand for higher risk assets returns to the market.
The USD CAD was under pressure most of the night, but traders began paring losses once equity markets started to show signs of weakness. A break through the recent bottom in crude oil also contributed to this morning’s turnaround. June Crude Oil is in a position to break sharply which could trigger a strong short-covering rally in the Dollar/CAD.
Technically, the Dollar/CAD formed a closing price reversal bottom. Based on the current formation, watch for a rally to 1.0423 over the near-term.
The Australian Dollar firmed up overnight after a report showed that the economy added a greater-than-expected 33,700 jobs in April. This was good news for the Aussie because it shows that the economy is growing despite six interest rate increases. The pre-report estimate was for an increase of 22,500 jobs. Prior to last night’s jobs data report many traders felt that the Reserve Bank of Australia’s series of interest rate cuts were slowing down the economy. The new jobs number may be an indication that the economy may be able to handle another hike.
Technically, the Aussie appears to be building a supportive bottom which could trigger a further rally into a retracement zone at .9047 to .9228. A slowdown in demand for higher yielding assets or a sharp break in U.S. equity markets however is likely to make traders forget about an interest rate hike and resume the recent downtrend.
The NZD USD traded higher overnight, partially because of the strength in the Australian Dollar and because of the increase in the country’s business main index from 56.7 to 58.9. Technically, this currency remains rangebound between .7325 to .7007. This makes .7166 to .7203 a key retracement zone. The close under the 50% price at .7166 puts this market in a weak position and should encourage further selling pressure, especially if the U.S. stock indices collapse.
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