Over the weekend, global banking regulators agreed to close to triple the size of capital reserves that banks must hold against losses. The requirement, however, is not expected to kick-in until 2019, which took the pressure off banks to begin increase capital immediately. The new regulation also gives the banks time to raise the new capital requirement through earnings rather than through the shifting of current capital.
On Saturday, China posted a report which showed industrial production was stronger than expected. Chinese retail sales also rose while August inflation of 3.5% was reported at the pre-report estimate. This helped squelch rumors of another round of monetary policy tightening by the Chinese central bank.
Last week investors liquidated their positions in U.S Treasury and Gold markets, indicating that traders were beginning to lean toward an investment in higher yielding assets. This action was partially responsible for the strong rally in equity markets and the higher yielding currencies overnight and throughout today’s U.S. trading session.
The U.S. Dollar traded sharply lower on increased demand for riskier currencies following the announcement of an agreement by global banking regulators to increase capital requirements. Traders celebrated the announcement because it was much softer than banks anticipated and removed some of the uncertainty that had been lingering in the banking community.
The key to sustaining the rally in the higher yielding currencies today was the strong rally in the U.S. equity markets. Although there was a sharp sell-off at midday, aggressive investors bought the dip, helping to underpin the Australian, New Zealand and Canadian Dollars.
The Euro was up over 1% against the Dollar as an agreement by global regulators on the size of a bank’s capital reserves fueled trader appetite for risk.
The EUR USD traded sharply higher after piercing a downtrending Gann angle which has been holding the market back since August 6. Upside momentum was strong but has to continue to build in order to reach the next chart objective at 1.2960.
The size of the support base built recently and the three bottom formation at 1.2587, 1.2625 and 1.2644 suggests that this market has a strong chance to break out over the last swing top at 1.2919 and reach a .618 price level target by September 16.
The GBP USD traded higher, but not as strong as the Euro or the higher yielding currencies. The British Pound continued to find resistance on a downtrending angle from the 1.5997 top at 1.5465 tomorrow. Continue to look for downside pressure as long as the market remains below this angle. Look for an acceleration to the upside once this angle is penetrated.
The USD JPY sold off despite last week’s daily closing price reversal bottom which indicated a chance for a breakout to the upside to 84.62. A rally in U.S. equity markets this morning failed to trigger renewed interest in the carry trade which could be bullish for the Dollar/Yen. Traders were also waiting for some news from the Japanese government and the Bank of Japan regarding an intervention. The uncertainty regarding this matter may be keeping traders on the sidelines.
The strong rally in the Treasury Bond market despite greater demand for risky currencies and equities may be an indication that investors are still uncertain about the U.S. economy. This may be the reason why the Japanese Yen showed strength today.
Besides the threat of an intervention, the equity markets remain rangebound. Until these markets can break out of this range, traders may be skeptical about reviving the carry-trade. This will keep the pressure on the USD JPY.
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