Euro Briefly Pierces 1.30; Trend Down but Ripe for Short-Covering Rally
The Dollar Index continued to soar on Tuesday as it touched
its highest level since May 2009. After spending April trading on both sides of
a monthly 50% level, the Index is now in a position to test the .618 price.
Based on the major monthly range of 89.62 to 74.17, traders should look for the
market to test 83.72 over the near-term. This market should continue to remain
strong as long at 81.90 holds as support.
The Euro traded sharply lower on Tuesday, reaching a
12-month low at 1.2993. Although a bailout agreement was reached by the Greek
government, the European Central Bank and the International Monetary Fund over
the week-end, bearish traders have shifted their focus to the growing fiscal
problems in Spain and Portugal. Hedge
fund and large traders continue to press the short-side, but the technical
bounce after briefly breaking the psychological level at 1.30 may be an
indication that this currency is ripe for a short-covering rally.
The sharp break in the GBP USD is an indication that
concerns are building that the U.K.
economy could face similar fiscal problems as Greece. The main concern among
investors at this time is the May 6th election. In my opinion, the election
outcome is expected to yield two results and both of them are bearish to the Sterling.
Firstly, recent polls suggest that the election is too close
to call. This means that a hung parliament is likely. A hung parliament results
when there is no clear majority winner following the election. If no majority
is in control of the parliament then it is highly unlikely that moves will be
made to shore up the U.K.
economy and budget deficit problem. If this occurs, then the British Pound is
likely to weaken because of the threat of a possible credit rating downgrade
and the possibility of sovereign debt default.
Secondly, even if a majority party is elected to parliament
and moves are made to try to fix the economy, the first move is likely to be
massive budget slashing. The Pound is likely to break further if the U.K. is forced to make austere financial cuts
just like Greece.
Mistimed budget cuts when the economy is in need of stimulus could set the U.K. economy
into a double-dip recession.
The weak Euro sent the USD CHF sharply higher. Traders
expect the Swiss National Bank to intervene to defend its currency. Based the
12-month range of 1.1965 to .9918, the market is now trading inside the
retracement zone of this range at 1.0914 to 1.1183. Look for this pair to continue
to strengthen as long as the low end of the range holds with the upper end the
next objective. The severely oversold Euro may trigger a short-covering rally
in the Swiss Franc. Aggressive traders have to be careful about chasing this
The drop in gold, crude and equities helped to trigger a
break out rally in the USD CAD. After building a support base in April, this
pair finally crossed a swing top at 1.0215 to turn the main trend to up on the
daily chart. Upside momentum indicates that 1.0302 is the next upside objective
followed by 1.0366. The weakening Canadian Dollar is most likely pleasing to
the Bank of Canada which hinted last week that a strong currency is likely to
have an impact on inflation and monetary policy. This led this analyst to
believe that the BoC was intervening to weaken the Loonie. Look for the USD CAD
to continue to strengthen unless there is renewed demand for higher risk
The AUD USD traded sharply lower on Tuesday. Late last night
the Reserve Bank of Australia
hiked its benchmark interest rate as expected by 25 basis points to 4.50%.
Based on comments from RBA Governor Glenn Stevens, this is likely to be the
last rate hike for a while. Stevens feels that the RBA has reached its
objective by bringing rates back to normal between 4.50% and 5.00%. He further
added that he feels inflation was likely to remain in the upper half of the
RBAâ€™s target range.
Adding further to the weakness in the Australian Dollar was
the sell-off in the equity markets. Traders also remain a little cautious as to
whether a tighter monetary policy in China will curtail demand for
Aussie goods and services.
Based on the main weekly range of .8577 to .9387, traders
should look for the Aussie to correct to .8982 to .8886.
On Tuesday, the NZD USD fell in sympathy with the Australian
Dollar and a lack of demand for higher yielding assets. Based on the activity
by the RBA, many traders now feel the Reserve Bank of New Zealand
will wait until the second half of the year before raising rates. The chart
formation suggests a test of the former top and current breakout area at .7199
is likely. If this price fails to hold, then look for a full retracement to
.7188 to .7156.
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