DOLLAR: Surprisingly the Dollar hasn’t really come under aggressive liquidation pressure in the wake of a definitive improvement in macro economic sentiment. In fact, the Dollar doesn’t appear to be pressured overnight in the wake of more new highs for the move in various stock market measures and in the face of some fairly strong German Manufacturing readings and better than expected Australian employment readings. In other words, the liquidation of flight to quality positions in the Dollar seems to have abated. On the other hand, the Dollar doesn’t seem to be inclined to fall further despite the pre-existing trend view and the relative proximity to the US stress test results. Perhaps the Dollar is stalled waiting for the ECB policy statement but unless there is some European bank bailout plan announced, we doubt that the ECB will make a strong move. In conclusion, the Dollar appears to have forged fairly solid consolidation support around the 84.00 level and we might see a temporary bounce today in the wake of the scheduled data and the stress tests results. But ultimately we think that the Dollar is going to continue to grind lower on the charts, with a lower low forged in one of the next three trading sessions. Sell rallies in the Dollar.
EURO: Since the ECB was slow in responding to the crisis it would not be that surprising to see them cut rates after the need to cut rates seems to have passed. More than likely the ECB will make some capital announcements and promise stimulus if needed. But we suspect that the news from the policy front will be mundane or even if there is a change, the markets will give the news little fanfare. In fact, the Euro should have made ground on the Dollar over the last several trading sessions as a wave of gains in world equity markets and US employment optimism should have lifted the Euro. In short, we continue to think that Dollar weakness will be manifest in strength in the Pound and Canadian and only slightly in the Euro. Critical support is seen at 132.44 and the failure to hold above that level would simply highlight the Euro’s lack of bullish resolve.
YEN: A big range down washout overnight would seem to suggest that the yen continues to feel the pressure of sagging flight to quality fears. However, we would not be surprised to see the Yen catch at least a temporary lift in the immediate aftermath of the stress test result. But we would expect that surge to dissolve fairly quickly. In fact, on a bounce back toward 102.17 in the coming 36 hours of trade, one might bank profits on any long side plays and then get outright short the Yen for a possible test of the 100 level sometime next week.
SWISS: With a series of lower highs on the Swiss charts this week, it was abundantly clear that the trade wasn’t seeing the Swiss as a recovery currency. In fact, we aren’t even sure that the Swiss is considered a flight to quality currency when conditions in the global economy are troublesome. Therefore, the Swiss doesn’t appear to have a long list of bullish themes from which it can benefit. If the Swiss has gone down this week in the face of macro economic optimism, then maybe it will get a very weak and temporary bounce off the US stress test results before it resumes its trek toward the April lows.
POUND: The Pound’s up trend has maintained this week despite some claims that the gains were somewhat restrained. Granted, given the magnitude of the optimism and the persistent gains in global equity prices, one might have expected bigger gains in the Pound, but with the US stress tests and monthly payrolls hanging over the market’s head, it is probably a good thing that the Pound hasn’t become significantly overbought. Favorable UK banking results overnight would seem to underpin the bull’s case and without something really negative from the US over the coming two trading sessions, we would expect the up trend in the Pound to continue. Those not long might look for a temporary setback to 150 to get long.
CANADIAN DOLLAR: Clearly the Canadian retains its recovery currency status with the June contract managing to reach the highest level since November 5th in the overnight trade. While the Canadian might be somewhat overbought and therefore vulnerable to the US stress test results we don’t expect the Canadian to be dramatically undermined by coming events. However, for those not long the Canadian, a break back down to 85.05 might be considered a good entry point. Higher equities, higher energies and metals prices and ongoing macro economic optimism are the hallmarks of the bull’s case.
TODAY’S MARKET IDEAS: Expect a temporary counter trend reaction in the wake of the US bank stress test results.