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 121â€™05. T-Bonds began to break from the 121â€™14 high near the mid-session
after triggering stops above the last main top at 121â€™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 Fridayâ€™s U.S. Non-Farm
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.
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 Fridayâ€™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 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 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. 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 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 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.
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