Monday August 24, 2009 - 12:40:25 GMT
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Forex Hound - www.forexhound.com
Forex Traders Looking for Direction
Following Fed Chairman Bernanke‚Äôs bullish comments which sent higher risk assets higher and the Dollar lower on Friday, the Forex markets appear to be looking for direction overnight.
While increased demand for higher yielding assets put pressure on the Dollar from March until the first week in August, the recent surge in the equity markets has occurred without too much of a decline in the U.S. Dollar. This could be a sign that traders are paying more attention to how the central banks will begin to unwind stimulus and quantitative easing plans. In other words, the central bank that begins to raise rates first will most likely attract the most buying attention to its currency and currently it looks as if the Dollar has the most to gain.
Since the first week in August when the European Central Bank left rates alone and the Bank of England increased funding for its quantitative easing plan, the Dollar has showed strength against the Euro and British Pound. This trend is likely to continue if traders believe the U.S. will set the pace for the global economic recovery.
The USD CAD has also gained considerably since the first week in August. At that time the Canadian government reported an increase in unemployment. Despite the recent surge in equity and energy prices, the USD CAD is still holding on to the bottom which was formed on August 4th. Over the short-run the USD CAD has been giving back some of its recent gains, but traders should begin to watch for the possibility of a double-bottom. This will be especially important if U.S. economic data continues to show signs of a recovery.
An improving economy and renewed interest in the carry trade should help the USD JPY. As the U.S. economy continues to show signs of improvement, look for traders to press the Yen lower.
Two currencies that may not be affected by the recovery in the U.S. at this time are the AUD USD and NZD USD. Both are likely to continue to rise along with the equity markets and greater demand for higher yielding assets. Only if the Fed begins to hint at a rate hike will these two currency pairs begin to show weakness. Of course a stock market break will also put pressure on these markets.
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