This week’s action in the foreign currency markets has been dominated by choppy, two-sided trading. Traders seem to be looking for improved risk appetite but can’t find the catalyst that will propel the markets to new highs for the year.
Yesterday’s strong rally in the crude oil market and the spillover buying in the global equity markets has laid a good foundation for a rally in the risk sensitive currencies, but volume has been light and traders non-committal which could be an indication that traders are waiting for more solid economic evidence that an economic recovery is taking place and that financial markets are stabilizing.
A recovery in China’s Shanghai Index boosted stock markets in Europe and Asia and sent the September E-mini S&P 500 to a new high for the week. Yesterday’s huge recovery in equity markets was triggered by a rally in crude oil following a bullish inventory report. Equity traders will be looking for a follow-through rally today in the energy complex to help boost prices. Otherwise this market could break sharply. Volatile trading is expected ahead of tomorrow’s option expiration.
September Treasury Bonds and Treasury Notes have been trading choppy most of the week with a slight bias to the upside. Investors cannot seem to decide which fundamental event to follow. Earlier in the week, the Treasuries rallied when equity markets broke and the Dollar strengthened. Yesterday’s rally in crude oil and equities sent yields higher, thereby weakening the bonds and notes.
The September British Pound is one of the foreign currency markets that seems to be poised to resume its rally but hasn’t received the boost it needs from the economic side of the equation.
A strong rally in crude oil and the equity markets is likely to trigger renewed interest in the Euro this morning. If these two markets can sustain their current upside momentum then look for the Euro to make another run at overtaking the resistance at 1.4247 to 1.4295. A close over 1.4295 will be a sign of strength, but taking out 1.4329 will turn the main trend to up on the daily chart.
The September Canadian Dollar has been under pressure since the Canadian unemployment report earlier this month showed an increase in jobs lost. Weaker equity and crude oil markets also contributed to the weakness in the Canadian Dollar as traders lost interest in holding on to higher risk assets.
The bottoming action this week in the equity markets has helped form a short-term bottom in the September Canadian Dollar at .8987. Yesterday’s surge in crude oil prices helped trigger a strong rally and put this market in a position to rally further as traders seem ready to renew their demand for higher yielding assets.
December Gold could turn out to be a big winner this week if the Dollar weakens substantially. At this time it looks as if gold is slowly building a support base while it waits for the Dollar to make its move. If yesterday’s action is an indication of greater demand for risky assets then look for gold to mount the start of a huge rally.
December Crude Oil rallied sharply higher yesterday following a bullish supply/demand report which showed a greater than expected drawdown. Traders will be looking for a follow-through rally today to confirm that yesterday’s rally was real. Crude oil is bumping up against major support so it will be interesting to see if traders are willing to pay up for oil in an attempt to trigger stops and ignite a breakout rally over the high for the year.
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