Euro Touches New Low for Year; No Solution to Debt Woes in Sight
The Euro touched a new low for the year, taking out the late
March bottom at 1.3267. Although the break to 1.3257 was met with profit-taking
and bottom picking, the fundamentals are still suggesting that this pair has a
long way to go before support is established.
By all reports, Greece continues to move closer to
sovereign debt default. It looks as if the bailout from the EU/IMF proposed
earlier in the month will not be enough to meet Greeceâ€™s financial obligations. The
cost to finance the debt is sky-rocketing so unless there is a plan in the
works to rewrite Greeceâ€™s
financial obligations it looks as if it has no choice but to default. Contagion
is another concern for investors. As the Greek financial situation worsens, so
do the financial problems in Portugal
The spread between Greece Bonds and German Bunds continues
to be the best indication that there is risk of default. Yesterday this spread
traded over 500 basis points. On Thursday, the Dollar rose against the Euro
despite on-going talks to activate the loan agreement between Greece and the
International Monetary Fund. Short-traders believe there is not enough money in
this agreement to help Greece
over the long-run.
After a healthy three-day rally, the GBP USD closed lower
following the release of a worse than expected U.K. retail sales report. March
retail sales showed an increase of 0.4%. The increase was less than economist
estimates of 0.6%. Traders reacted by selling the British Pound as the report
indicated the possibility of slower growth in the economy.
Earlier in the week, the British Pound rose after the
government reported higher than expected consumer inflation. This news
triggered a rally in the Sterling,
but gains were limited on election concerns. Recent polls are showing the May
6th election may result in no party have a significant majority. This could
lead to a hung parliament meaning legislation to cut the U.K. deficit may be limited.
Overnight Fitch Ratings issued a statement which could weigh
on the Japanese Yen over the near-term. In commenting on the level of Japanese
debt, Fitch said the Japanese government â€śis one of the most indebted in the
world.â€ť It further added â€śIn absence of sustained economic recovery and fiscal
consolidation, government debt will continue to rise, placing downwards
pressure on sovereign credit and ratings over the medium term.â€ť
The initial reaction by traders drove the USD JPY to 93.34,
but weakening demand for higher yielding assets helped the Japanese Yen recover
as investors sought safety in lower yielding assets. A late session turnaround
equity markets helped drive down demand for lower yielding currencies,
triggering a surge in the USD JPY.The
rally helped take out earlier resistance at a 50% level at 93.18, sending this
pair to the .618 level at 93.55.
The USD CAD confirmed Wednesdayâ€™s closing price reversal
bottom at .9929. There was very little follow-through to the upside however, as
a late session surge in demand for higher risk assets helped to limit gains.
On Wednesday, the USD CAD hit a new 22-month low but there
was very little follow-through to the downside. This is usually an indication
of an oversold market. Technically, the closing price reversal bottom indicates
an impending short-covering rally which could send this pair up to 1.0072 to
1.0106. It looks as if increased demand for higher yielding assets will dictate
the short-term direction of this pair. The longer-term outlook is for the Canadian
Dollar to appreciate against the U.S. Dollar due to a better economy and higher
The AUD USD traded lower early in the session after
Wednesdayâ€™s rally failed to attract fresh buying, but a late session rally in U.S. equity
markets helped fuel a short-covering rally. The charts are indicating the possibility of a
second lower top at .9337. Downside pressure is building which could drive this
market into a support cluster at .9200 to .9191.
Fundamentally traders are confused about the next move by
the Reserve Bank of Australia.
Earlier in the month, a report showing that mortgage approvals had fallen
pressured the Aussie as it indicated that the RBA would hold rates steady at
its next meeting in May. Earlier this week however, the RBA minutes indicated
the possibility of a rate hike because of concerns about inflation. With these
two reports neutralizing each other, traders may be selling the Australian
Dollar on the thought that China
was reading to revalue the Yuan.
Continue to look for a choppy two-sided trade until traders
get a clear picture of the RBAâ€™s upcoming interest rate decision, China decides
on the revaluation of the Yuan or global equity markets take off to the upside.
The NZD USD traded in a tight range and finished slightly
better. .7124 continues to repel rallies. A breakout over this price will be a
strong indication that the Kiwi is going to move higher. A break through .7052
could trigger a sharp break.
Traders arenâ€™t sure which direction the Reserve Bank of New Zealand
will take at its next meeting. The economy doesnâ€™t seem to be strong enough to
begin hiking rates, but the RBNZ may be feeling pressure to increase interest
rates because of the recent hikes by Australia and the anticipated hike
by the Bank of Canada in June.
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