Investors sold higher risk commodities and stocks and bought lower yielding assets on concerns that the sovereign debt issues in Greece will spread to other economies in the Euro Region. The Dollar finished sharply higher versus most major currencies except the Yen.

Investor concerns about the sovereign debt woes in Greece ignited the break in equities and commodities overnight, but a decision by the Bank of England and poor U.S. jobs data helped to accelerate the rally in the Dollar. Traders took protection while seeking shelter in the Dollar and the Japanese Yen.

The EUR USD closed sharply lower, pressured by concerns that despite the proposal of a new budget plan, Greece lacks the means to deal with its deficit issues on its own. Fears were also being raised that the fiscal problems in Greece are not isolated and may spread throughout the Euro Region should it default on its debt. Risk aversion set in and traders bailed out of the Euro as they sought protection against the possibility of a collapse in Greece.

This morning the European Central Bank announced that interest rates would remain at 1% and the stimulus program intact as the economic conditions in the Euro Zone have not improved enough to warrant any changes. Although ECB President Trichet said he “is confident” that Greece would get its budget under control, traders acted as if it was going to take a bailout by the European Central Bank, the European Union or the International Monetary Fund to take care of the problem.

By the mid-session, the Euro was trading under an important 50% level at 1.3800. Downside momentum was strong which could drive this market to the .618 level at 1.3483 over the near-term.

As expected, the Bank of England announced that interest rates would remain at a historically low level. In addition, it voted to take a pause in its quantitative easing program, but left open the possibility that it would increase its asset buyback program should conditions warrant such a move. Traders didn’t like the news and sold the GBP USD aggressively. Investors are now becoming concerned that the deficit problems in the U.K. may escalate like is the case in Greece.

The USD JPY finished sharply lower as investors sought safety in lower yielding assets over concerns about the possibility of a sovereign debt default in Greece. Traders took the Yen higher after the ECB offered no viable solution to the problems in Greece, nor did the ECB provide any confidence that the matter would not spread to other Euro Region nations. The Japanese Yen tends to strengthen during economic turmoil and uncertainty.

Look for this pair to continue to be the risk sentiment indicator. As long as the fear of default exists, the Yen should continue to appreciate. At this time, the Bank of Japan has no plans to halt the rise in its currency. This could help fuel a steep decline in the USD JPY over the near-term.

The stronger Dollar pressured demand for commodities, namely gold and crude oil. This action helped to fuel weakness in the Canadian Dollar. Strong upside momentum drove the USD CAD through the last main top at 1.0720. The weekly chart indicates that 1.0870 is the next upside target.

The weakening Euro once again raised fears that the Swiss National Bank would intervene to prevent the Swiss Franc from appreciating too much versus the Euro. This helped the USD CHF mount a strong rally throughout the day. Barring any changes with the Greece sovereign debt situation, the next upside target is 1.0942.
The AUD USD closed sharply lower after making a new low for the week. News that Australian Retail Sales dropped 0.7% in December fueled most of last night’s break. Additional pressure came from a fall in demand for higher yielding assets. Concerns over risk are the catalysts behind the current weakness. The December low at .8734 was broken on Thursday, turning the main trend down on the weekly chart.
The NZD USD plunged to its lowest level since September overnight following the news that the New Zealand unemployment rate surged to its highest level since 1999. The move from 6.5% to 7.3% confirms the Reserve Bank of New Zealand’s concerns about a weak economy.

Today’s bearish news may force the RBNZ to change its forecast for a rate hike from the middle of the year to later.  Additional downside pressure came from traders dumping higher yielding assets because of the possibility that debt issues in Greece would spread to other Euro nations. The weekly chart reaffirmed the down trend when it broke through support at .6970.

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