The Euro remained under pressure on Monday despite an
announcement by Greece,
the European Union and the International Monetary Fund that a 3-year bailout
package has been reached which will provide as much as $146 billion for the
The bailout agreement which was highly expected failed to
restore confidence to the Euro, most likely because speculators still believe
the sovereign debt problems in the Euro Zone are likely to spread to Spain, Portugal
Each recent rally in the Euro has been met by more selling
pressure which has triggered a break to a new low for the year. This pattern is
expected to continue as the direction of the Euro is clearly in the hands of
the shorts. Recently released Commodity Futures Trading Commission Commitment
of Traders data shows that hedge funds and other large speculators are
dictating the direction of this market. The report shows that these large
traders increased net wagers on a Euro drop by 25% to 89,013 contracts in the
week ended April 27th.
Clearly if large traders believed that the bailout package
was going to save the Euro, the number of net shorts would have decreased. The
increase in the number of net shorts indicates that bearish traders are gaining
confidence in the possible demise of the Euro. Last week the S&P Corp.
downgraded the debt rating of Spain
This action helped throw fuel on the fire as it no doubt confirmed to the
bearish traders that they were trading the Euro from the right side.
Although the Greece
bailout package may be providing the nation with some breathing room, the
market is saying that traders remain cautious. It is easy for the policymakers
to require beaten countries like Greece to agree to more austere
financial measures, but it is another thing to make them follow the new rules.
The Euro is also under pressure from traders who simply
believe the Euro Zone is going to be mired in this financial crisis for some
time. In addition to expectations of contagion in the region, some bearish
traders are increasing bets that the European Central Bank will not be able to
raise interest rates during a time period when most major industrial nations
are considering rate hikes. Other traders believe that the situation in the
Euro region will grow to the point where credit markets become locked up much
like they were during the height of the Lehman debacle. Putting everything
together, it looks as if the situation is likely to worsen which means downside
pressure will remain on the Euro.
The weakness in the Euro and concerns about European
sovereign debt issues also spread to the GBP USD on Monday. Not only do British
Pound investors have to be worried that its sovereign debt will get downgraded
by a credit ratings service, but they also have to deal with the possibility of
hung parliament after the May 6th election.
According to recent polls, the U.K. election is too close to call.
This means the election may result in no party having a majority in parliament.
Without a majority calling the shots, it seems unlikely that the parliament
will be able to tackle its sovereign debt problems and its budget deficit.Without guidance and direction, the
government may be unable to come up with a viable plan to fight its fiscal issues,
if this occurs, then look for the U.K. debt rating to be slashed at some point
this year. This action will compound the weakness in the British Pound and
drive the currency lower.
While the European Central Bank has its hands tied regarding
interest rates, the Fed is slowing moving closer to raising rates. This is
increasing speculation that the Euro will weaken, driving up demand for
dollar-denominated assets. Stronger gold, crude oil and stocks rose on Monday,
helping to boost the Canadian Dollar. This helped the USD CAD weaken after a
couple of days of speculation that this pair would rise because of the
possibility of an intervention by the Bank of Canada.
Late last week, BoC Governor Mark Carney said that a high
priced currency can have an impact on inflation and monetary policy. This
seemed to be a subtle hint that the Canadian Dollar was getting a little too
high. It also served as a verbal intervention, leading to a short covering
rally in the USD CAD.
Traders should watch this currency pair carefully over the
near-term. Although expectations are for the BoC to begin increasing interest
rates as early as June, the USD CAD may get volatile as the two bearish and
bullish forces clash. If demand for higher risk drops, driving stocks lower,
then look for the Canadian Dollar to fall. Renewed interest in higher yielding
assets could drive the Canadian Dollar back toward parity.
Tonight, the Reserve Bank of Australia is expected to announce
its policy statement. Traders expect the RBA to increase its benchmark rate by
.25 basis points to 4.50%. For months the RBA has said it will continue to hike
interest rates until they reach a normal level. According to RBA Governor
Stevens, the normal range is 4.50% to 5.00%.
Recent policy statements suggested that the growing global
economy is the main reason to increase rates. Recent economic reports suggests
that inflation if high. This is another reason why the RBA is expected to
The debt problems in Greece
and the Euro Zone have not had an impact on Australia, but the RBA may take
this into consideration when discussing the rate hike. Unless it sees the
problem having an effect on the Australian economy, donâ€™t expect it to get in
the way of an interest rate hike. Furthermore, China is expected to tighten rates
soon. This issue may be raised by Australian policymakers, but not expected to
hurt the economy to the point where an interest rate hike isnâ€™t warranted.
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