For the fourth straight day, investors dumped higher risk assets for the safety of the U.S. Dollar.  Today’s weakness reflects a change in sentiment toward lower yielding assets.  Many investors are beginning to realize that central banks are gearing up to end their stimulus programs and begin considering other ways to remove excess liquidity from their financial systems.  As a result, investors are taking money off the table in the asset classes that benefitted the most from the weaker Dollar.  

The EUR USD finished sharply lower.  Based on the recent range of 1.4480 to 1.5063, the Euro has retraced .618 to 1.4696.  A successful test of this area could result in the start of a short-covering rally, but traders have to watch the momentum before trying to pick a bottom.  The daily closing price reversal top at 1.5063 has been confirmed and the objective reached.  A weekly reversal in still possible if the Euro finishes lower for the week on Friday.  Based on the current set-up, there may be vicious retracement to the upside as bearish traders try to set up a secondary lower top.

During the recent sell-off, traders piled on the GBP USD with almost every currency gaining on the Sterling.  This is most likely the main reason why the British Pound was relatively stronger than the other currency markets today.  For example, as the Euro weakened, traders were forced to unwind Euro/Pound spreads.  This gave the British Pound strength.  It isn’t that the British Pound is perceived as stronger than the Dollar; it’s just that the spreads have to be adjusted.  Once this situation is rectified, the GBP USD should weaken as money leaves higher yielding assets.  Fundamentally, the U.K. economy remains weak as evidenced by the recent report showing a contraction in the economy during the Third Quarter.  This weakness is causing speculation that the Bank of England will expand and extend its asset purchase program.

The USD JPY lost substantial ground today as Japanese investors increased their repatriation of investment funds.  Often at the end of the month, Japanese companies repatriate funds earned overseas.  While this may be happening, additional support is being provided by investors taking money out of higher yielding assets.  The key area to watch is 90.15.  This price represents a 50% retracement of the recent rally and could prove to be an important support price for the start of a short-covering rally.

Weaker equity and crude oil markets coupled with stern comments from the Bank of Canada are helping to trigger a huge surge in the USD CAD.  The current rally has retraced more than the normal amount which could be indicating overbought conditions.  This will not be known until the market stops going up and pulls back into the retracement zone at 1.0695 to 1.0602.  If upside momentum continues then look for serious resistance to develop as the market approaches an old top at 1.0991.  

The USD CHF rallied sharply higher today after an early hesitation at the 50% level at 1.0242.  The close over this price indicates a test of 1.0292.  Weakness could develop under 1.0242, but buyers are likely to come in at an uptrending Gann angle at 1.0192.

Investors dumped the AUD USD hard after Australian inflation numbers came out slightly below pre-market estimates.  The Aussie sold off as investors took out the premium that was put in on speculation that the Reserve Bank of Australia would hike interest rates by 50 basis points at its next meeting in November.  Traders are now figuring a 25 basis point hike will suffice at this time.  

Additional pressure is building on this market as rumors continue to swirl that China may end its stimulus program sooner than expected. This action would mean a cut in Australian exports.  On the other hand, Chinese production is expected to increase by 16% during the Fourth Quarter.  This may mean a pick-up in exports of raw materials.  Traders will have to decide which factor will have the biggest impact on the Aussie.  

Technically, the AUD USD is nearing a key 50% price at .8949.  If there isn’t a technical bounce at this price then look for a further decline to the .618 price at .8859.

The initial break today in the NZD USD was triggered by the weaker Aussie Dollar, but later in the day another harder down move took place as investors began to realize that the Reserve Bank of New Zealand is not going to hike rates before the end of the year.  Speculators are scrambling to get out of long positions.  Those who bought in anticipation of a rate hike were really taking a chance as recent comments from the RBNZ suggested that it would hold to its early decision to leave interest rates unchanged until mid-2010. 

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