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Thursday May 6, 2010 - 00:17:07 GMT
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Treasury Bonds Rally Sharply Higher in Flight to Safety Rally

June Treasury Bonds closed sharply higher as equity markets collapsed and demand for safer assets increased. The rally early in the trading session sent yields plunging while triggering a breakout over the last main top at 121’05. T-Bonds began to break from the 121’14 high near the mid-session after triggering stops above the last main top at 121’05. Higher volatility and strong upside momentum should underpin the markets, but gains could be limited if traders decide to lighten up their positions ahead of Friday’s U.S. Non-Farm Payrolls Report.

 

June Gold finished higher after a successful test of a key 50% level at $1158.60 encouraged fresh buying. Gold initially broke after a strong rally in the U.S. Dollar. A break in equity markets also helped drive down demand for the metal. After testing the 50% level at $1158.60 and putting in a bottom at $1156.20, gold began to rally as the Euro plunged over 1%.

 

Speculators began buying gold as a hedge against a possible collapse in the Euro. The strong momentum late in the trading session could lead to a follow-through rally on Thursday. The only negative to the gold market at this time appears to be margin call selling. Should equity markets break sharply again, traders may have to sell gold to meet their margin calls in the equity markets.

 

U.S. stock markets broke sharply lower after a steady opening as unrest in Greece led traders to shed risky equity positions. As we approached the mid-session, buyers stepped in to gobble up low priced stocks, triggering a massive short-covering rally that took the indices back to unchanged for a little while. Short-term oversold conditions could trigger a rally along with position evening ahead of this Friday’s U.S. Jobs Report.

 

A drop in demand for higher risk assets and the possibility that a slowdown in the Euro Zone economy will lead to lower demand for energy helped drive June Crude Oil lower early in the trading session. Shorts began to take profits after testing a key 50% level at 79.17, but bottom pickers were unable to turn this market positive. If the break continues through 79.17 then look for a possible test of the Fib retracement level at 77.18.

 

The June Euro 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 government’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 day’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 Moody’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 fall in the price of gold and crude oil helped drive the June Canadian Dollar sharply lower Wednesday morning. After changing the trend to down on the daily chart on Tuesday following the breakdown under the last swing bottom at .9789, bearish traders set their sights on the March 26th bottom at .9705. Downside momentum took this price out fairly easily, taking out stops on the penetration. The weakness continued until just before the major 50% level at .9649. At this point, gold and crude began to rally and weak shorts began to take profits. At the close, the Canadian Dollar was down for the day but well off its low.

 

Weaker gold, crude and equities should help to trigger further weakness in the June Canadian Dollar. After building a support base in April, this pair appears ripe for even further downside movement. Gold may rally because of hedging against the demise of the Euro; this may help to limit losses in the Canadian Dollar.

 

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 Canadian Dollar to continue to weaken 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. Today’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 weak Euro sent the June Swiss Franc sharply lower. Traders continue to expect the Swiss National Bank to intervene to defend its currency. Based the 12-month range of .8222 to 1.0099, the market is now trading inside the retracement zone of this range at .9161 to .8939. Look for this pair to continue to weaken as long as the high end of the range holds with the lower end the next objective.

 

A flight to safety rally triggered by falling equity and commodity prices helped to drive up the June Japanese Yen. After failing to follow-through to the downside through a former main bottom at 1.0558, this market turned around and rally sharply higher throughout the day. The charts indicate the next upside level is 1.0727 to 1.0773. The movement in the equity markets should continue to dictate the direction of the Japanese Yen.

 

The June British Pound 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 the Sterling 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 British Pound 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 country’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 Moody’s credit rating agencies said that a debt rating cut is likely depending on how the new government chooses to attack the country’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.

 

 

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Forex news reports can be found on the forex research headlines page below. Here you will find real-time forex market news reports provided by respected contributors of currency trading information. Daily forex market news, weekly forex research and monthly forex news features can be found here.

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Real-time forex market news reports and features providing other currency trading information can be accessed by clicking on any of the headlines below. At the top of the forex blog page you will find the latest forex trading information. Scroll down the page if you are looking for less recent currency trading information. Scroll to the bottom of fx blog headlines and click on the link for past reports on forex. Currency world news reports from previous years can be found on the left sidebar under "FX Archives."



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15:00 US- Existing Homes Sales
15:30 US- EIA Crude
Thu 21 Dec
03:00 JP- BOJ Decision
13:30 CA- CPI & Retail Sales
13:30 US Weely Jobless
13:30 US- GDP
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Mon 25 Dec
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