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Wednesday January 20, 2010 - 19:18:22 GMT
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Greece’s Budget Problems Pushes Euro to 5-Month Low

The U.S. Dollar is continuing to push toward new highs at the mid-session against most major currencies as investors seek refuge in lower-yielding currencies following the announcement by China that it was asking banks to curb lending for the rest of the month.

China’s attempt to reign in bank lending is an attempt to put the brakes on a massive lending spree in an effort to cool the economy. The availability of easy money through government stimulus and favorable loan conditions helped fuel a huge surge in the Chinese economy. The pace of the growth is a concern for central bank officials. Tomorrow, China is expected to report double-digit 4th quarter GDP growth.

The Dollar is also receiving a boost from the election of a Republican to a key U.S. Senate seat in Massachusetts. This event is bullish for the Dollar because some feel it may signal an end to excessive government spending that has been weakening the Greenback.

The combination of China’s aggressive tightening action along with the Republican victory is boosting the Dollar while putting pressure on equities and commodities.

The EUR USD continued its freefall on concerns over Greek budget issues. Overnight the move accelerated to the downside after International Monetary Fund Managing Director Dominique Strauss-Kahn said Greece’s debt woes are “serious”. Without any aid from the European Union, or the European Central Bank, look for Greece’s debt issues to continue to mount.

European officials have stood there ground about providing financial help to Greece, saying that it is not their problem to solve. They also fear that providing aid will mean other countries such as Spain, Portugal and Ireland will begin lining up with their hands out in expectations of free money.

Technically, the EUR USD broke through the December bottom at 1.4217, reaffirming the down trend on the weekly chart. The chart indicates that 1.3800 is the next major downside target, although 1.4000 may provide some psychological support. At this time, it looks as if the only event that can turn the Euro around will be if the EU or ECB provides help to Greece.

The GBP USD is trading sharply lower at the mid-session after support failed. Overnight Bank of England Governor Mervyn King issued a dovish comment about Tuesday’s higher than expected inflation report. Earlier losses were limited, however, after a report showed that the U.K. unemployment rate fell at the fastest pace since April 2007 in December.

Although the British Pound failed to form a closing price reversal top on Tuesday, it sold off, nonetheless, when a 50% support price at 1.6355 was violated. The chart indicates that 1.6175 is the next downside target.

Overnight the BoE’s King said that Tuesday’s reported spike in inflation was a short-term event and not likely to last. The cause of the surge in inflation was most likely the additional stimulus the BoE added in late Fall.

China’s order to reign in bank loans is likely to slow down the growth in the global economy and put pressure on higher yielding assets. This should help to put pressure on the USD JPY, but so far trading has been lackluster and sideways.

The USD JPY is at a critical point on the charts. Although Tuesday’s closing price reversal bottom was confirmed by a follow-through rally last night, the lack of follow-through to the upside should be a concern to the bulls. Traders seem to be indecisive about which way to play the Japanese Yen.

The USD CHF continued to soar after it broke through a key retracement price and a downtrending Gann angle. The break in the Euro is making Swiss central bankers nervous which could lead to a surprise intervention.

On Tuesday, the Bank of Canada left interest rates unchanged, but took measures to weaken the Canadian Dollar by increasing its asset-buyback program. Weaker stocks, gold and crude oil could put additional pressure on the Canadian Dollar.

Technically, a new main range has been formed in the USD CAD at 1.0745 to 1.0224. The first upside target of this range was 1.0484. This price was tested when the market touched 1.0480 earlier in the trading session. A breakout over this level will trigger a further rally to 1.0546.

News that China was taking steps to limit loans in an effort to cool the economy is helping to put pressure on the AUD USD, one of its largest trading partners. The Aussie is currently testing uptrending Gann angle support at .9094. If this angle fails to hold then look for additional selling pressure to push this market to the retracement zone at .9031 to .8961.

In addition to the bearish news from China, the NZD is trading weaker because of an unexpected drop in consumer prices. Prices fell 0.20 percent during the 4th quarter which lessens the chances of an interest rate hike sooner than expected. At this time, traders believe the Reserve Bank of New Zealand will stick with its plan to begin raising rates some time after the middle of the year.

Overnight, the Kiwi broke through a long-term uptrending Gann angle and plunged sharply lower. Based on the main range of .6970 to .7206, the first downside target was reached at .7206. A failure to hold this price signals a further decline to .7150.

 

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