The Euro reversed earlier weakness to form a daily closing price reversal bottom. This pattern sets up the start of a possible 2 to 3 day rally to 1.2742.
The weakness Wednesday morning was triggered by yesterday’s news that Germany was banning naked short-selling of certain assets. Traders sold the Euro hard as they speculated that the action by Germany was a sign that there was trouble in the banking system.
After traders failed to push the Euro down to what many consider to be the next objective at 1.20, weak shorts quickly covered driving the market higher. Rumors also helped to fuel the reversal. Talk was circulating that the Swiss National Bank was behind the rapid turnaround. The thought was that the SNB grew tired of selling the Swiss Franc so it decided to buy the Euro instead. This rumor has not been substantiated. In addition, shorts may have panicked on the thought that perhaps the European Central Bank was going to begin a round of intervention of its own.
Lower equity prices hurt the USD JPY early in the session. Traders sold higher risk assets while seeking shelter in the lower yielding Japanese Yen. Last week the Dollar/Yen made a range of 94.98 to 88.25. This range creates a 50% price level at 91.61. At this time the Dollar/Yen feels comfortable at this balance point on the chart. It also seems to be taking on the characteristics of a pivot price. The close above this level indicates that a short-term bottom may have been formed.
The USD CAD closed up but off its high. Lower demand for higher risk assets helped to apply the upside pressure. Based on the range of 1.0738 to 1.0110, the retracement zone at 1.0424 to 1.0498 was today’s target. The high end of this range was penetrated earlier in the session on strong momentum, but a slowdown in buying brought the market back below it. Wednesday’s close over the 50% level at 1.0424 indicates there is still strength in the current pattern. A close over the .618 level at 1.0498 will put in it in a strong position to rally further. The strong reversal in crude oil could be indicating a bottom. If crude rallies on Thursday, look for the USD CAD to be under pressure.
Hedge funds and large traders dumped assets in Australia and New Zealand on the thought that demand for higher yielding assets and commodities would fall as the Euro Zone issues shut down the global recovery. The AUD USD was down sharply, testing levels not seen since September 2009. The NZD USD was also down sharply. The chart indicates a change in trend to down on the monthly chart with a retracement to .6263 likely over the next few months.
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