The U.S. Dollar fell sharply across the board on Thursday as trader demand for risky assets soared following a bullish economic report out of Europe last night. The release of a better-than-expected Euro Zone industrial report combined with Bernanke’s dovish testimony sent a signal to investors that the European Central Bank is moving closer to a possible rate hike while the Fed is still struggling with the possibility of a double-dip recession.
Furthermore, the bullish Euro Zone numbers are a sign that the ECB is likely to refrain from applying additional stimulus measures while the weakening U.S. economic data means the Fed is likely to consider a second round of quantitative easing.
The strong rise in the Euro spread to other currency markets as traders positioned themselves for a weaker U.S. economy. Traders demanded higher yielding assets as they anticipated the Fed leaving interest rates lower for a much longer period of time than previously estimated. U.S. Treasury Bond traders are currently pricing in the possibility of a Fed rate hike for September 2011. The bullish news about the Euro Zone and the dovish outlook for the U.S. economy is especially bullish for commodity-linked currencies.
The need for stimulus spending by the United States and the possibility of a global economic recovery means demand for raw materials is likely to increase. This should help Canada, Australia and New Zealand since their economies are driven by demand for commodities such as iron ore, copper and crude oil. While the Australian and New Zealand Dollars are surging to the upside, the Canadian Dollar is strengthening but remains in a range. The upward movement in the Canadian Dollar is most likely being limited by its ties to the U.S. economy.
The Aussie Dollar reaffirmed its uptrend on Thursday with a breakout rally through the last swing top at .8870. In addition, the market closed above a key .618 level, indicating further upside action is likely. The uptrend will remain intact as long as the swing bottom at .8632 holds as support.
Greater demand for higher risk assets and a much better outlook for the global economy helped send the New Zealand Dollar higher. The strong close put the market in a position to challenge the last swing top at .7303. A move through this level will bring the market closer to the early May top at .7325 and a possible surge to the upside. Increasing demand for risk along with the possibility of another rate hike in by the Reserve Bank of New Zealand in less than a week while the U.S. ponders more quantitative easing is bullish for the Kiwi.
Trading may be rangebound tonight as investors await the European bank stress test results. Investors want to see some banks – especially in Spain and Greece – flagged so that they can be assured that the tests were stringent enough. If the tests reveal that all banks passed, then investors will question the validity of the exams. Many investors are looking for the reports to show that several banks need more capital. Earlier in the month European Central Bank President Trichet hinted that this would be likely so this news will not be too much of a surprise.
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