The U.S. Dollar finished the first full session back from the holiday weekend by posting gains against most major currencies. Risk aversion was the theme today as traders punished the Euro and the commodity linked-currencies while seeking shelter in the Japanese Yen and believe it or not the British Pound.
The GBP USD soared 1 percent Tuesday boosted by speculation that U.K. insurer Prudential may withdraw its takeover bid of AIA. Many traders saw this as a positive for the British Pound because it eliminated the debt load that Prudential was expected to take over had the deal gone through.
The bearish action in the Euro also helped the British Pound by driving traders into the relative safety of the U.K. Gilt market. Investors seem to be feeling a little more optimistic about the U.K. economy and debt obligations now that the new government has taken positive steps toward cutting the deficit and reducing borrowing. If the current upside momentum continues, then look for a possible short-term drive to 1.4810 over the near-term.
The EUR USD closed down but off its low. Early Monday night, the Euro took out May’s low at 1.2143 but failed to attract fresh selling pressure. This market was trading lower primarily on the news of the resignation of German President Kohler and on concerns that France may become the latest country to face sovereign debt issues or a debt reduction by the credit agencies. Additional selling pressure hit the Euro after the European Central Bank said that many more banks than previously estimated will face bad loan write downs.
The inability to attract new shorts and a turnaround in U.S. equity markets helped to encourage a mid-day short-covering rally, but these gains were erased when U.S. stock markets turned negative into the close. The main trend is down, but the chart pattern suggests that bearish sentiment may be shifting. A trade through 1.2453 will turn the main trend to up.
The USD CHF was in a position to post a daily closing price reversal top after failing to break out to the upside, but this pattern disintegrated into the close when the Euro erased its earlier gains. Look for higher markets and increased volatility should the Euro fail to hold its recent lows. Traders expect the Swiss National Bank to continue to sell Swiss Francs or buy Euros in an effort to protect its economy.
After testing a major 50% price level at 91.61, the USD JPY traded weaker, driven lower by greater demand for lower yielding assets. The huge sell-off in U.S. equities into the close drove traders into the safety of the Japanese Yen late in the session. This trend is likely to continue if U.S. equity markets continue to sell-off overnight and tomorrow.
Early Tuesday morning the Bank of Canada announced a 25 basis point interest rate hike and the market hardly moved. This indicated that the main focus of traders at this time is risk aversion. Overnight, lower crude oil and equity prices helped to drive up demand for the USD CAD. Once equity markets settled and rallied, the Canadian Dollar began to make its move. This action failed to attract fresh buyers and the Dollar/CAD was able to close higher. Traders seem to have priced the rate hike into the market and are now focusing on the July meeting. Based on the comments from the BoC after the meeting, the recent turmoil in the global economy is making it highly unlikely that a second rate hike will take place.
Overnight the Reserve Bank of Australia announced that it would leave interest rates unchanged. This was a sign that it is concerned that a slowdown in the global economic market would pressure the Australian economy. In addition earlier weakness in the global equity markets helped drive down demand for higher yielding currencies. Lower U.S. equity markets means the Aussie is likely to continue to take heat.
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