The U.S. Dollar finished lower, pressured by increased appetite for risky assets, despite a call from Treasury Secretary Geithner for a stronger currency. Trading remained subdued today ahead of central bank meetings on February 4th and the U.S. Jobs Data Report on the 5th.
Technical factors helped draw selling pressure to the Dollar. At the start of the week, the Dollar Index, a trade-weighted basket of currencies, was at overbought levels based on the Relative Strength Index and the Stochastics Oscillator. In addition, traders remain less skittish this week about seeking higher risk assets. Low volume also contributed to the loss in the Dollar. Noticeably absent was a major stopper in the market.
The Dollar was under pressure from the New York opening, following a weak overnight showing. A comment from Treasury Secretary Geithner regarding a tighter U.S. budget and a stronger Dollar did trigger a pause in the weakness about mid-session, but that move did not materialize into anything substantial. Higher demand for gold, crude oil and equities held the Dollar in check most of the day and pressured it into the close.
The AUD USD took a huge hit early last night on the surprise announcement that the Reserve Bank of Australia was leaving interest rates unchanged at 3.75% after three consecutive hikes. There is no doubt that the moves by China to tighten its lending practices as well as rein in its stimulus package had an influence on the central bank’s decision.
The Aussie fought back to finish off its low, which led to speculation that the overnight break was more long liquidation rather than fresh selling. In my opinion, the move by the RBA was more of a surprise to economists than traders who have been pressuring the Aussie Dollar since China first began tightening. The lesson to traders caught long overnight is to watch the bond market for indications as to which way traders are leaning.
The EUR USD finished higher after yesterday’s closing price reversal bottom formation. This pattern signals that a correction in the downtrend is taking place. So far the charts do not indicate that a change is trend is in the offing yet. Traders continued to cover recently established short positions as pressure from the financial crisis in Greece seemed to be fading.
On Thursday, the European Central Bank is expected to announce that interest rates will remain steady. In addition, investors expect to hear more upbeat news on Wednesday when the European Union releases its official opinion on Greece’s efforts to shore up its budget. Early talk is that Greece plans on making drastic changes to slash its budget deficit. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level.
The GBP USD reversed earlier weakness to finish slightly higher. Low volume was the highlight today amid speculation that traders have turned less negative towards the economy despite a poor housing market, the growing fiscal deficit, and uncertainty regarding the upcoming U.K. election. On February 4th, the Bank of England is expected to announce that interest rates will remain near zero. Traders are still trying to decide whether the BoE will increase or extend its quantitative easing program. Last quarter’s poor GDP number may force the BoE’s hand.
The USD JPY traded weaker today despite increased demand for higher yielding assets. The word is that speculators pushed around a thinly traded session on the presumption that the central bank is less likely to intervene to weaken a strong Yen. The news from Australia may increase demand for lower yielding assets, but the rise in the U.S. stock market is saying something else.
The rally in the Euro continued to take the pressure off the Swiss National Bank to intervene. This encouraged traders to sell the USD CHF which had rallied sharply over the past week. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Look for renewed pressure on the USD CHF if the Euro continues to strengthen. Look for volatility on Wednesday following the release of the EU’s opinion on the Greece budget solution. Based on current conditions, this pair may break back to 1.0495 before finding support.
Firmer equities, gold, and crude oil helped pressure the USD CAD. Monday’s closing price reversal top was confirmed overnight and a new main top was formed at 1.0720. The chart indicates that a minimum 2 to 3 day retracement is likely with a downside target of 1.0472.
NZD USD traders chose to ignore the weakness in the Aussie Dollar and instead decided to focus on the renewed demand for higher yielding assets. Higher stocks, gold and crude oil helped drive up higher risk assets to the benefit of the Kiwi. Oversold technical indicators and thin trading conditions ahead of this Friday’s U.S. employment report, also contributed to the rally.
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