Flight to Safety Rally Drives Dollar Index through Retracement Level
The fall in the price of gold and crude oil helped drive the
USD CAD sharply higher Wednesday morning. After changing the trend to up on the
daily chart on Tuesday following the breakout over the last swing top at
1.0215, bullish traders set their sights on the March 26th top at 1.0302.
Upside momentum took this price out fairly easily, taking out stops on the
penetration. The rally continued until just before the major 50% level at 1.0366.
At this point, gold and crude began to rally and weak shorts began to take
profits. At the close, the Dollar/CAD was higher for the day but well off its
Weaker gold, crude and equities should help to trigger a
further rally in the USD CAD. After building a support base in April, this pair
appears ripe for even stronger upside movement. Gold may rally because of
hedging against the demise of the Euro; this may help to limit losses in the
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 assets.
The U.S. Dollar gained ground against most major currencies
with the exception of the Japanese Yen on Wednesday boosted by demand for safer
assets. The Dollar Index continued its six month rally, touching its highest
level since May 2009. Todayâ€™s strong drive to the upside took out a .618
retracement level at 83.72. Continue to look for higher prices as long
conditions remain chaotic in the Euro Zone. Technically, it would be nice to continue
to hold above 83.72 now that this level has been broken, but the most important
support level is 81.90.
The EUR USD fell over 1% early in the New
York session as fear swept the Forex markets on concerns that Portugal and Spain
would become the next Greece.
The Euro was weak from the opening but the break accelerated to the downside
after videos of unrest in Greece
were broadcast worldwide.
Traders were able to witness firsthand the clash between Greek
police officers and workers over financial cuts. The demonstrations against the
Greek governmentâ€™s austerity measures even led to three deaths. Among the
economic concessions ordered are wage cuts for public workers, a freeze on
pensions and a second sales-tax increase. Some believe that Germany is behind these drastic cuts as a show
of power against Greece.
As part of the new bailout agreement with the International
Monetary Fund and the European Central Bank, Greece was required to make severe
budget cuts in order to qualify for the loans. The demonstrations hurt the
credit markets against Greece,
thus leading to hard pressure on the Euro. The currency plunged sharply lower throughout
the session as hedge funds and large speculators continued to press it in the
absence of seemingly any bids.
Shortly before the mid-session and after reaching a low of
1.2803, oversold conditions and a short-covering rally in the equity markets
triggered a turnaround n the Euro, but this move failed to take the market away
from the strong hands of the short traders. Although at one point upside
momentum looked as if it was going to produce a closing price reversal bottom,
all the market could muster was a 50% retracement of the dayâ€™s range.
Aggressive traders now expect further downside action as
contagion fears are sweeping the Euro Zone. Most investors expect further
erosion of support as Moodyâ€™s is expected to slash the credit rating of either Spain or Portugal over the next two days.
On Thursday the European Central Bank will hold its monetary
policy meeting. Traders expect interest rates to remain unchanged. The policy
statement is expected to address that fact that rates will remain low for an
extended period of time as the Euro Zone will need time to sort out its
financial mess. ECB President Trichet is also expected to address the problems
in Greece, Portugal and Spain. In his post-meeting speech,
he is most likely going to try to boost the confidence of Euro investors.
The weak Euro sent the USD CHF sharply higher. Traders
continue to 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.
A flight to safety rally triggered by falling equity and
commodity prices helped to drive down the USD JPY. After failing to
follow-through to the upside through a former main top at 94.77, this market
turned around and changed the trend to down with a move through 93.93. The
charts indicate the next downside level is 93.08 to 92.73. The movement in the
equity markets should continue to dictate the direction of the Japanese Yen.
The GBP USD finished lower but off its bottom. The British
Pound traded sharply lower Wednesday morning as it fell in sympathy with the
Euro. Other than the weakness triggered by the Euro this morning, the tone in
seemed to be a little more upbeat as investors began to factor in the
possibility of a victory by the Conservative Party following the May 6th
election. Traders are also beginning to accept the notion that no matter which
party wins the majority of the parliament, austere financial measures will have
to be enacted in order to tighten up the U.K. budget and shore up its debt
or risk a possible downgrade by the credit rating services.
The GBP USD was trading better overnight as investors
increased bets on a victory for the Conservative Party. No matter how the election
pans out, traders are counting on the new government to mount a steady attack
on the countryâ€™s huge budget deficit. This may mean the implementation of new
taxes and austere cost slashing. U.K. voters realize that either a
Conservative Party or Labour Party victory will mean aggressive action will
have to be taken in order to avoid the same fate as the Euro Zone economies.
Last week, both the S&P and Moodyâ€™s credit rating agencies said that a debt
rating cut is likely depending on how the new government chooses to attack the
countryâ€™s fiscal problems.
Technically, the British Pound tested a retracement zone at
1.5163 to 1.5078. Additional support was being provided by an uptrending Gann
angle at 1.5087. The main trend is down, but this market appears ripe for a
short-covering rally. A move above 1.5163 will indicate strength.
The AUD USD was under pressure due to renewed weakness in
equity markets. Early Tuesday 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.
Besides the weakness in the equity markets overnights and
the falling demand for higher risk commodities, 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.
The NZD USD fell in sympathy with the Australian Dollar and
a lack of demand for higher yielding assets. Based on this weekâ€™s policy
statement 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 that .7199 is a key pivot
number, followed by .7163. The main trend is up and does not turn down unless
the swing bottom at .7052 is taken out. The first clue that a change in trend
is imminent will be the breaking of a long-term uptrending Gann angle at .7121.
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