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Wednesday July 21, 2010 - 07:16:11 GMT
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Aussie Dollar Rallies on Interest Rate Talk

The Australian Dollar rebounded on Tuesday following a three-day setback boosted by stronger U.S. equity markets and increased demand for currency-linked commodities. Speculation mounted that the central bank would raise interest rates before the end of the year following news that the Asian Development Bank increased its growth forecast for China. This encouraged investors to buy the Aussie in anticipation of improved economic conditions because of increased demand for Australian raw materials.

 

Technically, the AUD USD maintained its uptrend despite the short-term correction to .8632. The strong move on Tuesday puts the Aussie in a position to take out the swing top at .8870 and the .618 retracement level at .8883. A penetration of these two levels is likely to trigger an acceleration to the upside.

 

The strong rise in the Australian Dollar along with talk of another interest rate hike by the Reserve Bank of Australia triggered a strong rally in the New Zealand Dollar. With the Aussie’s likely to hike rates before the end of the year and the Bank of Canada setting its benchmark rate 25 basis points higher this morning, Kiwi investors gained confidence that the Reserve Bank of New Zealand would be next in line to adjust interest rates higher.

 

Technically, the NZD USD rebounded after testing the 50% level of the .6794 to .7303 range. The main trend is up, but the market may run into minor resistance at .7166 to .7198.

 

After trading in a tight range most of the morning, pressure from rising equity prices and commodities finally ignited a sell-off in the USD CAD. Early this morning, the Bank of Canada hiked its benchmark interest rate by 25 basis points. This increase was in line with expectations, but the dovish tone of the policymaker’s statement helped hold the Dollar/CAD inside a tight range most of the morning. Once U.S. equity markets rebounded from a weaker opening, traders aggressively bought the Canadian Dollar.

 

Technically, the USD CAD is still locked inside of two ranges. The broad range is .9929 to 1.0853 with a mid-point of 1.0391. The narrower range is 1.0853 to 1.0137 with a mid-point of 1.0495. Currently this pair is trading between the mid-points of each range.

 

A rumor of a possible intervention by the Bank of Japan helped underpin the USD JPY on Tuesday. A turnaround in the stock market pressured demand for lower yielding currencies, thereby adding to the bullishness of the Dollar/Yen. Although an intervention from the BoJ is possible, traders are taking a precautionary approach to the long side due to the fact that the strength in the Yen has been caused by a weakening U.S. economy and not excessive speculation. The BoJ is worried that the strengthening Yen will lead to decreased demand for Japanese exports. Investors are likely to remain short until the swing top at 89.15 is violated. A breakout above this point will turn the main trend to up, setting up a possible rally to 90.62.

 

The British Pound rebounded against the Euro after Hungary’s smaller-than-expected debt auction renewed sovereign debt concerns in the Euro Zone.

 

Early in the session the British Pound was under pressure due to concerns about the economic recovery triggered by a weaker-than-expected budget deficit and lower mortgage approvals.

 

Technically, the GBP USD survived a two-day break while keeping the main up trend in tact. Tuesday’s strong upside momentum indicates the market may have enough power to test the last swing top at 1.5471. A new main bottom at 1.5152 may also form, adding to the Pound’s growing series of higher bottoms.

 

The biggest concern facing the Pound at this time is whether the U.K. economy can strengthen enough to trigger a rate hike by the Bank of England. Traders are extremely worried that the economy will weaken further because of the newly approved austerity measures.  This would make the U.K.’s debt rating vulnerable to a downgrade by the ratings agencies.

 

The EUR USD traded lower, pressured by sovereign debt concerns in Europe following poor demand for Hungary’s debt. Profit-taking ahead of Friday’s release of the European bank stress tests results added to the weakness. Traders are nervous about what the report will reveal. Some feel the test wasn’t stringent enough; others feel that it will show several banks need to raise more capital.

 

After testing a Fibonacci retracement level at 1.2998 and trading all the way to 1.3028, the Euro posted a daily closing price reversal top on Tuesday. This is the second such reversal in two days signaling increasing selling pressure. A follow-through to the downside is needed to confirm the reversal. Watch for weakness to develop if the 50% level at 1.2783 fails to provide support.

 

Over the near-term, stronger demand for higher risk assets is likely to continue to underpin the commodity-linked currencies. Profit-taking is expected to continue to pressure the Euro as traders await Friday’s European bank stress test results.

 

 

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