The Euro tumbled to a new low for the year after Spainâ€™s
debt was downgraded to AA. Traders initially sold off the Euro in a knee-jerk
reaction, but selling pressure quickly dried up. Although the Euro reached a
new low for the year, the selling pressure was not as intense as Tuesdayâ€™s
reaction. This was because investors had already discounted the possibility of
After bottoming about mid-morning, trading stabilized in the
Euro until the early afternoon when the Federal Reserve released its policy
statement. The FOMC kept interest rates at historically low levels and left its
somewhat dovish statement intact. In other words, rates are to remain low for
â€śan extended periodâ€ť. Although the Fed sees improvements in the economy it
still feels that unemployment is a problem as well as tight consumer credit.
Furthermore it thinks the housing market can be improved. Once again the Fed
stated that inflation is expected to be â€śsubduedâ€ť. The Euroâ€™s rally accelerated
to the upside after the Fedâ€™s statement was digested.
Wednesdayâ€™s trading action seemed to be indicating that
traders had faith that a resolution between Greece and the EU/IMF would be
reached soon. This was probably the reason for the less aggressive trading on
the short-side. In fact, the way the market traded, it looks as if
bottom-pickers were stepping in. At the close, the Euro formed a closing price
reversal bottom which could lead to a 2 to 3 day rally and a retracement to
Bearish traders should remain cautious at current levels so
they donâ€™t get caught in a massive short-covering rally. There are still plenty
of shorts still in the game, but it isnâ€™t going to take much to encourage the
weaker shorts to cover fresh losing positions.
It looks as if traders are backing away from aggressively
shorting the Euro as long as the EU/IMF is still working out the details of the
bailout. If anything should happen during the negotiations and talks were
called off, then look for the Euro to plunge. As long as the bailout dialogue
is open, it appears as if traders have priced in the worse case scenario for
the time being.
Talk of a â€śfragileâ€ť economy and renewed concerns about the U.K. election
led to a hard sell-off in the GBP USD on Wednesday. Investors are also
concerned that the problems in the Euro Zone may soon spread to the U.K. This is
the main reason why traders are worried about the May 6th election.
With the election too close to call at this point in time,
traders are worried that the outcome may result in a hung parliament. If this
occurs than it is possible that political uncertainties may result in a failure
to achieve a balanced budget. This would cause more debt to be issued, leading
to the possibility that the U.K.
credit rating will be lowered. With an explosive situation brewing in Europe,
it would not take much for debt issue problems to escalate in the U.K.
The strong recovery in U.S. equity markets helped rally
the USD JPY. In addition, traders are worried that Japanese debt may be next in
line to be downgraded. Like certain Euro Zone nations and the U.K., Japan has a huge debt problem on
its hands which could lead to a downgrade. Not only are traders selling the Yen
as a carry trade, but today it looked as if traders were pressuring the Yen in
anticipation of a debt rating downgrade.
Renewed interest in higher yielding assets and lower
interest rates in the U.S.
helped drive the USD CAD lower. With the Bank of Canada already on record
stating that interest rates are going to move higher in June and the Fed saying
that U.S. rates will remain
low for â€śan extended periodâ€ť, the interest rate advantage has shifted to Canada. This is
the primary reason for the strength in the Canadian Dollar on Wednesday.
Longer-term traders should continue to press the USD CAD lower because of the
strengthening Canadian economy and the likelihood of a series of interest rate
hikes over the next several months.
Higher than expected inflation and soft Fed comments, helped
to drive the AUD USD higher. On Wednesday, the Australian Dollar advanced from
a four-week low after a government report showed inflation almost doubled
during the last quarter. This triggered a short-covering rally on renewed talk
that the Reserve Bank of Australia
would raise interest rates at its May meeting.
After holding steady throughout the day, the Aussie surged
to a new high for the day after soft comments from the U.S. Federal Reserve
indicated that interest rates would remain at historically low levels. With the
Fed holding rates steady and the RBA likely to raise rates, the interest rate
differential remained in favor of the Aussies. This led to a strong rally after
the release of the Fedâ€™s FOMC statement.
The NZD USD traded mostly higher on Wednesday and closed better
after the Fedâ€™s FOMC statement indicated that interest rates would remain low
for â€śan extended periodâ€ť. With the Reserve Bank of New Zealand ready to issue its
policy statement tonight, traders bought the Kiwi in anticipation of a hawkish
commentary. Although the RBNZ is on record stating that interest rate are to
remain low until at least the middle of the year, some traders are speculating
that recent economic developments may be putting pressure on the central bank
to hike interest rates sooner than expected.
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