The Dollar Index continued to soar on Tuesday as it touched its highest level since May 2009. After spending April trading on both sides of a monthly 50% level, the Index is now in a position to test the .618 price. Based on the major monthly range of 89.62 to 74.17, traders should look for the market to test 83.72 over the near-term. This market should continue to remain strong as long at 81.90 holds as support.
The Euro traded sharply lower on Tuesday, reaching a 12-month low at 1.2993. Although a bailout agreement was reached by the Greek government, the European Central Bank and the International Monetary Fund over the week-end, bearish traders have shifted their focus to the growing fiscal problems in Spain and Portugal. Hedge fund and large traders continue to press the short-side, but the technical bounce after briefly breaking the psychological level at 1.30 may be an indication that this currency is ripe for a short-covering rally.
The sharp break in the GBP USD is an indication that concerns are building that the U.K. economy could face similar fiscal problems as Greece. The main concern among investors at this time is the May 6th election. In my opinion, the election outcome is expected to yield two results and both of them are bearish to the Sterling.
Firstly, recent polls suggest that the election is too close to call. This means that a hung parliament is likely. A hung parliament results when there is no clear majority winner following the election. If no majority is in control of the parliament then it is highly unlikely that moves will be made to shore up the U.K. economy and budget deficit problem. If this occurs, then the British Pound is likely to weaken because of the threat of a possible credit rating downgrade and the possibility of sovereign debt default.
Secondly, even if a majority party is elected to parliament and moves are made to try to fix the economy, the first move is likely to be massive budget slashing. The Pound is likely to break further if the U.K. is forced to make austere financial cuts just like Greece. Mistimed budget cuts when the economy is in need of stimulus could set the U.K. economy into a double-dip recession.
The weak Euro sent the USD CHF sharply higher. Traders expect the Swiss National Bank to intervene to defend its currency. Based the 12-month range of 1.1965 to .9918, the market is now trading inside the retracement zone of this range at 1.0914 to 1.1183. Look for this pair to continue to strengthen as long as the low end of the range holds with the upper end the next objective. The severely oversold Euro may trigger a short-covering rally in the Swiss Franc. Aggressive traders have to be careful about chasing this market higher.
The drop in gold, crude and equities helped to trigger a breakout rally in the USD CAD. After building a support base in April, this pair finally crossed a swing top at 1.0215 to turn the main trend to up on the daily chart. Upside momentum indicates that 1.0302 is the next upside objective followed by 1.0366. The weakening Canadian Dollar is most likely pleasing to the Bank of Canada which hinted last week that a strong currency is likely to have an impact on inflation and monetary policy. This led this analyst to believe that the BoC was intervening to weaken the Loonie. Look for the USD CAD to continue to strengthen unless there is renewed demand for higher risk assets.
The AUD USD traded sharply lower on Tuesday. Late last night the Reserve Bank of Australia hiked its benchmark interest rate by 25 basis points (as expected) to 4.50%. Based on comments from RBA Governor Glenn Stevens, this is likely to be the last rate hike for a while. Stevens feels that the RBA has reached its objective by bringing rates back to normal between 4.50% and 5.00%. He further added that he feels inflation was likely to remain in the upper half of the RBA’s target range.
Adding further to the weakness in the Australian Dollar was the sell-off in the equity markets. Traders also remain a little cautious as to whether a tighter monetary policy in China will curtail demand for Aussie goods and services.
Based on the main weekly range of .8577 to .9387, traders should look for the Aussie to correct to .8982 to .8886.
On Tuesday, the NZD USD fell in sympathy with the Australian Dollar and a lack of demand for higher yielding assets. Based on the activity by the RBA, many traders now feel the Reserve Bank of New Zealand will wait until the second half of the year before raising rates. The chart formation suggests a test of the former top and current breakout area at .7199 is likely. If this price fails to hold, then look for a full retracement to .7188 to .7156.
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