The EUR USD traded sharply lower overnight and early in the session as nervous traders reacted to the news that Spain’s government had taken over a struggling financial institution. The heavy selling pressure last night was also a sign that short-traders were still lurking out there with their fingers on the sell button.
This action triggered fear that sovereign debt problems were spreading across Europe. Shortly after the U.S. opening, the Euro began to stabilize after testing a daily chart .618 retracement level at 1.2345. Regaining the 50% level at 1.2407 will put the Euro in a strong position to rally into the close.
From a technical perspective, today’s action was not bad. Following last week’s daily/weekly reversal bottoms the market was expected to confirm these patterns with a follow-through rally, but instead, the bad news drove the market back down into a retracement zone. If last week’s bottom is good, then a secondary higher bottom should begin forming in this retracement zone. In other words, stopping between 1.2407 and 1.2345 will be the first strong indication that buyers are stepping in. The first leg of the bottoming process is usually short-covering; the second leg is when the buyers step up.
The GBP USD traded a little lower after confirming a new two-day main bottom at 1.4229. Based on the new range formation, look for the start of a possible rally to 1.4810 over the near-term. The announcement this morning of new budget cuts was received positively because it is a sign that the new government is willing to work swiftly to help shore up the U.K.’s budget deficit and huge debt obligation.
After earlier weakness, the USD JPY strengthened after the U.S. stock market firmed. Earlier in the session, investors were selling the Dollar/Yen in anticipation of a flight-to-safety rally. The recovery rally in the U.S. stock market has helped ease demand for lower yielding assets. Traders are also a little nervous about holding long Yen because of the threat of a government intervention.
Stronger gold prices and a recovery in the U.S. equity markets helped to pressure the USD CAD. On Friday, the Dollar/CAD found solid resistance at an old top at 1.0738. The new range formation indicates that this currency is poised to retrace back to 1.0430.
The recent strength in the Dollar/CAD was not related to any bad economic news out of Canada. Investors were dumping higher risk assets because of expected lower demand for Canadian resources. The Canadian banking system and economy are still in pretty good shape compared to the rest of the world. Speculators were merely lightening up long positions in anticipation of a slowdown in demand for Canadian resources should the world enter another recession. Watch gold and crude oil for direction.
The Australian Dollar finished lower but in a position to confirm Friday’s closing price reversal bottom with a rally through .8365. A trade through this price will put the AUD USD on pace to test a 50% level at .8728. With the trend still down, this type of formation usually leads to a 2 to 3 day rally. This indicates that excessive volatility is likely to hit the Aussie over the next few days. A failure to trigger a confirmation of the reversal bottom will be a strong indication that this market is in the hands of strong short-sellers.
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