The U.S. Dollar gained ground against most major currencies with the exception of the Japanese Yen on Wednesday boosted by demand for safer assets. The Dollar Index continued its six month rally, touching its highest level since May 2009. Today’s strong drive to the upside took out a .618 retracement level at 83.72. Continue to look for higher prices as long conditions remain chaotic in the Euro Zone. Technically, it would be nice to continue to hold above 83.72 now that this level has been broken, but the most important support level is 81.90.
The EUR USD fell over 1% early in the New York session as fear swept the Forex markets on concerns that Portugal and Spain would become the next Greece. The Euro was weak from the opening but the break accelerated to the downside after videos of unrest in Greece were broadcast worldwide.
Traders were able to witness firsthand the clash between Greek police officers and workers over financial cuts. The demonstrations against the Greek government’s austerity measures even led to three deaths. Among the economic concessions ordered are wage cuts for public workers, a freeze on pensions and a second sales-tax increase. Some believe that Germany is behind these drastic cuts as a show of power against Greece.
As part of the new bailout agreement with the International Monetary Fund and the European Central Bank, Greece was required to make severe budget cuts in order to qualify for the loans. The demonstrations hurt the credit markets against Greece, thus leading to hard pressure on the Euro. The currency plunged sharply lower throughout the session as hedge funds and large speculators continued to press it in the absence of seemingly any bids.
Shortly before the mid-session and after reaching a low of 1.2803, oversold conditions and a short-covering rally in the equity markets triggered a turnaround in the Euro, but this move failed to take the market away from the strong hands of the short traders. Although at one point upside momentum looked as if it was going to produce a closing price reversal bottom, all the market could muster was a 50% retracement of the day’s range.
Aggressive traders now expect further downside action as contagion fears are sweeping the Euro Zone. Most investors expect further erosion of support as Moody’s is expected to slash the credit rating of either Spain or Portugal over the next two days.
On Thursday the European Central Bank will hold its monetary policy meeting. Traders expect interest rates to remain unchanged. The policy statement is expected to address the fact that rates will remain low for an extended period of time as the Euro Zone will need time to sort out its financial mess. ECB President Trichet is also expected to address the problems in Greece, Portugal and Spain. In his post-meeting speech, he is most likely going to try to boost the confidence of Euro investors.
The weak Euro sent the USD CHF sharply higher. Traders continue to expect the Swiss National Bank to intervene to defend its currency. Based on 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 of the next objective.
A flight to safety rally triggered by falling equity and commodity prices helped to drive down the USD JPY. After failing to follow-through to the upside through a former main top at 94.77, this market turned around and changed the trend to down with a move through 93.93. The charts indicate that the next downside level is 93.08 to 92.73. The movement in the equity markets should continue to dictate the direction of the Japanese Yen.
The GBP USD finished lower but off its bottom. The British Pound traded sharply lower Wednesday morning as it fell in sympathy with the Euro. Other than the weakness triggered by the Euro this morning, the tone in the Sterling seemed to be a little more upbeat as investors began to factor in the possibility of a victory by the Conservative Party following the May 6th election. Traders are also beginning to accept the notion that no matter which party wins the majority of the parliament, austere financial measures will have to be enacted in order to tighten up the U.K. budget and shore up its debt or risk a possible downgrade by the credit rating services.
The GBP USD was trading better overnight as investors increased bets on a victory for the Conservative Party. No matter how the election pans out, traders are counting on the new government to mount a steady attack on the country’s huge budget deficit. This may mean the implementation of new taxes and austere cost slashing. U.K. voters realize that either a Conservative Party or Labour Party victory will mean aggressive action will have to be taken in order to avoid the same fate as the Euro Zone economies. Last week, both the S&P and Moody’s credit rating agencies said that a debt rating cut is likely depending on how the new government chooses to attack the country’s fiscal problems.
Technically, the British Pound tested a retracement zone at 1.5163 to 1.5078. Additional support was being provided by an uptrending Gann angle at 1.5087. The main trend is down, but this market appears ripe for a short-covering rally. A move above 1.5163 will indicate strength.
The fall in the price of gold and crude oil helped drive the USD CAD sharply higher Wednesday morning. After changing the trend to up on the daily chart on Tuesday following the breakout over the last swing top at 1.0215, bullish traders set their sights on the March 26th top at 1.0302. Upside momentum took this price out fairly easily, taking out stops on the penetration. The rally continued until just before the major 50% level at 1.0366. At this point, gold and crude began to rally and weak shorts began to take profits. At the close, the Dollar/CAD was higher for the day but well off its high.
Weaker gold, crude and equities should help to trigger a further rally in the USD CAD. After building a support base in April, this pair appears ripe for even stronger upside movement. Gold may rally because of hedging against the demise of the Euro; this may help to limit losses in the Canadian Dollar.
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 was under pressure due to renewed weakness in the U.S. equity markets. Early Tuesday night the Reserve Bank of Australia hiked its benchmark interest rate as expected by 25 basis points 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.
Besides the weakness in the equity markets overnights and the falling demand for higher risk commodities, 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.
The NZD USD fell in sympathy with the Australian Dollar and a lack of demand for higher yielding assets. Based on this week’s policy statement 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 that .7199 is a key pivot number, followed by .7163. The main trend is up and does not turn down unless the swing bottom at .7052 is taken out. The first clue that a change in trend is imminent will be the breaking of a long-term uptrending Gann angle at .7121.
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