The inability of the
U.S. stock market to hold on to overnight gains fueled a turnaround in
the Dollar which erased gains in the Euro and British Pound. Early
session gains were also pared in the Swiss Franc and Canadian Dollars
but these currencies managed to remain positive at the mid-session.
market conditions and reduced demand for safe-haven assets helped to
weaken the U.S. Dollar overnight but this scenario was unable to
trigger fresh buying in equities and gold once the U.S. markets opened.
new geopolitical event is developing in Iraq which may push aside
concerns about European debt issues for the time being. News that a
faction of the Iranian army visited an Iraqi oilfield could be the
catalyst behind this morningâ€™s risk aversion trade. Investors may be
flocking to the Dollar ahead of this week-end in anticipation of an
escalation of events between Iraq and Iran.
The EUR USD erased
all of its earlier gains and made a fresh low for the week. Traders
became more risk averse after U.S. equity markets failed to add on to
earlier gains. This renewed interest in lower yielding assets helped
weaken the Euro. Earlier in the morning, oversold conditions and the
news that German business confidence rose to a 17-month high in
December helped pare some of yesterdayâ€™s losses.
appetite contributed to the early strength in the GBP USD, but these
early gains were erased when demand for higher yielding assets
declined. The British Pound made a new low for the week, but appears to
be trying to mount a small comeback at the mid-session.
the Bank of England Financial Stability Report said the U.K. financial
system is â€śsignificantly more stableâ€ť. It did add, however, that the
â€śprobability of default by U.K. real estate companies has increased
significantlyâ€ť. The British Pound could see volatile trading over the
next couple of months as the Bank of England begins to phase out of its
quantitative easing program. The possibility that U.K. households will
continue to face weakening labor conditions as well as tightening
credit conditions could fuel further weakness. Finally, the threat of a
cut in the U.K. debt rating from AAA remains a concern among long-term
The weakness in the equity markets is triggering
another round of carry trade reversals which is helping to pressure the
Japanese Yen. Last night the Bank of Japan left its benchmark interest
rate at 0.10%. In addition, it hinted that its biggest concern remains
deflation. Overall there were no surprises in the policy statement.
CAD traders are watching the situation in Iraq this morning for the
possibility of a spike in oil prices. Look for the Canadian Dollar to
strengthen if crude oil finishes the day strong. Most of yesterdayâ€™s
gains have been erased this morning, and the USD CAD is once again
trading inside of its 60 day range.
Overbought conditions are
pressuring the USD CHF. Yesterdayâ€™s spike to the upside may have been
too much to handle. Higher gold prices because of the geopolitical
event between Iraq and Iran, has helped contribute to todayâ€™s weakness.
Traders sold the Swiss Franc yesterday on concerns the sovereign debt
issues in Europe would adversely affect the Swiss Banking system. Now
that debt concerns have eased, traders are using this lull in the
market to take profits after yesterdayâ€™s surge.
The AUD USD is
bouncing back after two days of selling pressure. Traders have been
pressuring the Aussie this week because of the strong possibility the
U.S. will begin raising interest rates. This event will trim the spread
between Australian and U.S. rates since the Reserve Bank of Australia
is likely to take a pause in its quest to raise rates, making the
Aussie a less attractive investment. This currency pair could drop
further if demand for higher yielding assets continues to erode.
Todayâ€™s action is most likely profit-taking or short-covering and has
had no particular effect on the down trend.
A similar situation
is facing the NZD USD. A reduction in demand for higher yielding assets
is pressuring the Kiwi, but losses have been limited because of hawkish
comments from the Reserve Bank of New Zealand earlier this month. This
market is now in a position to test the â€śRBNZ bottom at .7043. Taking
out this price will erase all of the gains attributed to the hawkish
comments from the central bank.