China Loosens Currency Peg driving up Demand for Higher Risk Currencies
Higher risk currencies are set to surge today after China loosened
its reins on the Yuan over the week-end. Although the timing of the move by China
to allow its currency to appreciate against the Dollar came as a surprise, the
action followed months of serious negotiations between the U.S. Treasury and
the Chinese government.
Global demand for goods and services is expected to increase
because the action by China
makes imported goods less expensive for Chinese consumers. A strong Yuan
compared to the Dollar should be most beneficial for U.S. manufacturers and exporters.
Investors are selling the Dollar this morning and aggressively buying commodity-linked
currencies. This theme is expected to set a strong tone for higher risk currencies
this morning while putting pressure on the Greenback.
The AUD USD gapped higher overnight, taking out a major 50%
level at .8727 while setting up a further rally to the Fib retracement level at
.8823. The news from China
is expected to be extremely beneficial to the Australian economy.
Greater demand for risk is also driving up the NZD USD.
Traders are buying in anticipation of greater demand for New Zealand
goods and services. .7150 is the next upside target. The steepness of the rally
indicates that the currency is nearing overbought status. This could slow down
the rate of ascent but not necessarily change the trend.
The news from China initially triggered a sharp
rise in the EUR USD which has since weakened as traders shift their interest to
currencies which will benefit the most from the strong Yuan. Currently the Euro
is starting to form a closing price reversal top. This indicates that the
selling is greater than the buying at current price levels and could fuel the
start of a 2 to 3 day correction. Also this morning, the main trend turned up
on the daily chart, but this move failed to attract any fresh buying.
Technical factors are contributing to a weaker GBP USD this
morning after a strong surge overnight. Traders began selling the British Pound
after an overnight rally ran into resistance at a .618 price level at 1.4947.
Support is trying to be established at a 50% level at 1.4810. A failure to hold
this price should trigger an acceleration to the downside.
Currently, the British Pound is setting up a daily closing
price reversal top. This should trigger the start of a 2 to 3 day break back to
support at 1.4040. Money is clearly shifting out of the European theatre and
into the Pacific Rim currencies.
Strong equities and commodities are also triggering a break
in the USD CAD. Downside momentum is building which could drive this currency
pair into the nearest support area at 1.0110.
The USD JPY reversed earlier weakness overnight after China made a
move to boost the value of the Yuan. Traders are moving money out of the lower
yielding Japanese Yen and into more risky assets in an effort to catch a better
return. The rise in global equity markets is also leading to increased interest
in the carry trader. This trading strategy means increased borrowing in Yen,
the subsequent selling of the Yen and a conversion into Dollars. This explains
today‚Äôs rise in the USD JPY.
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