The USD JPY soared on Wednesday, buoyed by greater demand for risky assets and on speculation that the next prime minister will favor a weaker currency.
The Japanese Yen began to weaken overnight following the resignation of Japanese Prime Minister Yukio Hatoyama. Traders are worried that the economy will weaken further during the election process at a time when China’s economy is slowing and Europe continues to struggle. In addition, speculators sold the currency because they believe the next prime minister will be Naoto Kan who favors a weaker currency. Firm U.S. equity markets also contributed to the weakness in the Japanese Yen.
After piercing a key 50% retracement level at 91.61 overnight, the USD JPY was able to establish support at this level, setting up a further rally to the Fibonacci retracement level at 92.41. A trade over this price could trigger an acceleration to the upside.
The U.S. Dollar finished the day down against most major currencies with the exception of the Japanese Yen. Low volume ahead of Friday’s U.S. Employment report may have contributed to the weakness in the Dollar as traders threw their support into the higher-risk, commodity-linked currencies after the thinly traded equity markets posted strong gains.
The EUR USD traded higher but inside of Tuesday’s range. This pattern indicates impending volatility. The lack of fresh news today helped to hold the market steady. A late session surge in U.S. equity markets helped turn the Euro positive shortly before the close.
Lately the news coming out of the Euro Zone hasn’t been encouraging for the bulls but hasn’t offered any surprises for the bears either. Look for an acceleration to the downside if bottom at 1.2110 fails to hold. Watch for a change in trend if the market can muster enough momentum to take out the last swing top at 1.2453. Volatility is expected to come back into the market in a big way so be prepared for unexpected news.
The strong rise in crude oil and U.S. equities put pressure on the USD CAD all session. Volatility is much higher today compared with Tuesday when the market barely reacted to the news of an interest rate hike by the Bank of Canada.
Wednesday’s break took out two key levels at 1.0481 and 1.0394 while changing the trend to down on the move through the last swing bottom at 1.0413. Signs that the global recovery may be back on track are likely to continue to strengthen demand for higher risk assets, especially crude oil. Losses may be limited by the news that the BoC is not likely to hike interest rates in July due to unstable conditions in the global economy.
The GBP USD posted a strong gain overnight to continue its move toward a major 50% price level at 1.4810 but buying dried up as the euphoria from the collapse of the Prudential/AIG deal wore off. Tuesday’s surge after the deal was cancelled was attributed to the short-covering of hedges placed by Prudential. Once they were done covering, no one was left to buy. A lower close today will form a daily closing price reversal top. This pattern usually sets up a 2 to 3 day break with the first objective 50% of the first leg up. The charts suggest a pull-back to at least 1.4499 or perhaps 1.4435 is likely during the 2 to 3 day time frame.
The USD CHF closed lower, and like the Euro had an inside day formation, indicating impending volatility. If the Euro rallies, then look for the Dollar/Swiss to take out the last swing bottom at 1.1469. A move through this price will turn the main trend down and could trigger a correction back to 1.1309 to 1.1218.
The AUD USD rallied sharply higher after once again finding support at a key 50% price level at .8308. The catalyst behind Wednesday’s rally was the strength in the U.S. equity markets and the better than expected U.S. Home Sales Report which indicated that the global economy may be back on track.
Thin trading conditions contributed to the strength in the U.S. equity markets which means that this rally may be short-lived. Many of the larger traders and institutions are standing on the sidelines ahead of Friday’s Non-Farm Payrolls report. Today’s rally is likely just position squaring and risk paring ahead of the report. Weakness will develop if selling hits the equities again and the Aussie can’t hold the retracement level at .8251. On the upside, momentum and short-covering could drive this market to .8550 over the near-term.
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