U.S. Dollar strengthens Overnight; Risk Aversion Highlighted
Once again risk aversion is taking center stage as traders
are buying the Dollar and shedding higher risk currencies. The main concern
driving the Dollar higher overnight is Greeceâ€™s ability to obtain
financial aid. Traders are pricing in the strong possibility that Greece will not
receive aid from the European Union and be forced to turn to the International
Monetary Fund for help.
Although Greece agreed to austere budget cuts to pacify the
EU, it seems that despite these moves members still are against providing aid
to the ailing Greek economy. Greece
needs the funding to get through this difficult transition period but cannot
afford to go to the open market to borrow money because of the high interest
rate it would have to pay. The cost to borrow would be prohibitive and the
amount of money required to service the debt would cripple the economy.
Volatility is high because of the persistent rumors that
keep circulating regarding the Euro. New reports overnight suggest that German
officials have indicated support for a joint bailout of Greece by the
EU and the IMF. The dissension among the EU community is being triggered by the
thought that bringing in the IMF will make the European economy appear to be
Additional pressure is being applied to higher risk
currencies because of the growing war of words between the U.S. and China regarding currency valuation.
is basically telling the U.S. Treasury to back off from calling the Yuan a manipulated
The USD CAD had a volatile morning after the release of
stronger-than-expected inflation data. The surprise increase in inflation
spurred speculation that Canadian interest rates may rise sooner than U.S. rates. The
Canadian Dollar is rallying on the news while upside momentum is driving this
currency closer to parity with the U.S. Dollar.
The USD CHF is trading higher because of the weaker Euro,
but gains have been limited by comments from Swiss National Bank Governing
Board member Danthine. He said yesterday that the SNB cannot keep borrowing
costs near zero for an extended period of time and maintain purchases of
foreign currencies indefinitely. This hawkish talk strengthened the Swiss Franc
although it is likely to remain weak against the Dollar because of persistent
interventions by the SNB to combat its perceived strength versus the Euro.
The British Pound is under pressure. More talk of a possible
double-dip recession in the U.K.
is pressuring the GBP USD. This report comes two days after the news was
released that the Bank of England would back off from extending and expanding
its quantitative easing program. Fundamentally, the British Pound is struggling
because of the weak economy, political uncertainty and concerns that its credit
rating would be cut if it cannot service its debt.
The USD JPY is strengthening ahead of a three-day holiday in
Japan. Investors are squaring up positions in the Yen ahead of this holiday.
The chart pattern suggests that a break out to the upside in the Dollar/Yen is
imminent especially if U.S.
equity markets break sharply.
Finally, demand for lower yielding currencies is putting
pressure on the Aussie and New Zealand Dollars. The second consecutive inside
day in the AUD USD suggests impending volatility. This could trigger a
short-term break to .9120 today.
The NZD USD is trading below a major 50% at .7124,
suggesting that this market is weakening after spending two days inside a
retracement zone at .7124 to .7199. If downside pressure prevails, then look
for a near-term break to .7012.
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