The U.S. economic data released this week seems to be confusing traders. The surprise drop in U.S. Retail Sales on Tuesday indicated weakness in the economy which led to another round of Dollar buying as traders suddenly became more risk averse. On Wednesday, however, the news that the U.S. CPI contracted for the first time since 1955 was treated like a non-event. One thing that is clear is that investors seem to be picking and choosing the strongest and weakest currencies rather than trading them collectively.
Forex traders don't seem to know which side of the Dollar to trade but it is clear that traders are taking positions according to the strength and weakness of each individual currency versus the Dollar. For quite some time each day we have become used to waking up and hearing the Dollar is weak this morning or the Dollar is strong overnight. For the past few days, however, we have been hearing the Dollar weak against the Euro or British Pounds are stronger against the Dollar. This could mean that the global economy is beginning to recover and that investors are placing their bets on the order of the recovery.
The EUR USD is barely holding on to its uptrend and closed in a position to breakout to the downside of its recent range. Pressure is mounting that the European Central Bank is ready to act aggressively in an effort to stimulate the economy.
Although he is not happy with the idea of interest rates under 1.0%, ECB governing council member Axel Weber is predicting that rates may fall as the ECB is expected to announce a package of non-standard monetary measures in May. News of this announcement pressured the Euro on Wednesday. The Euro may drop further before May if inflationary reports continue to come out on the weak side of expectations.
The best thing about lower inflation in the Euro Zone is that it gives the ECB more room to apply monetary stimulus to the economy. For months the ECB has been behind the curve when it came to interest rate cuts because of an unfounded fear of igniting inflation. While the majority of central banks were cutting rates to near zero, the ECB was holding rates steady to lower.
The GBP USD was up on Wednesday following a report by the Royal Institution of Chartered Surveyors that the British housing market was stabilizing. This could be a major turning point in the U.K. economy because it is widely accepted that weakness in the housing market triggered the beginning of the economic collapse.
The strong rally over the past few days is a strong indication that investors are betting on a recovery in the U.K. economy. The Pound could get another push higher over the next two days if Citigroup and JP Morgan have bullish earnings reports. If U.S. banks start to show profits then traders may speculate that U.K. banks such as Barclays and HSBC may also be on the road to recovery.
Even if the U.K. economy shows signs of faltering, investors are optimistic that the Bank of England stands ready to apply more quantitative easing to stimulate the economy.
The U.S. Dollar rose against the Yen after the Federal Reserve Beige Book showed that the economy continued to worsen over the last couple of months. The good news was that although the overall economy was weak, there were signs in 5 of 12 districts that some of the declines were moderate.
The late rally in the U.S. stock market encouraged more carry trade activity which put pressure on the Japanese Yen. This action is likely to continue if the stock market continues to post gains. A break in equities could trigger a short squeeze in the Yen.
The Canadian Dollar is showing the most strength of all the majors versus the Dollar. This is most likely because of strength in the U.S. equity markets and a firmer trade in industrial metals such as copper and platinum.
Losses in the USD CAD may be limited if traders anticipate aggressive action by the Bank of Canada. Most traders are looking for a rate cut to 25 basis points but are unsure of the BoC's quantitative easing plans.
The Australian Dollar could begin to feel pressure if the Reserve Bank of Australia acts aggressively to shore up the economy. Today a report showing heavy contraction in the economy seemed to put a halt to thoughts of an economic recovery. With the economy still showing signs of weakness and the RBA poised to take action, the only thing supporting this market is the carry trade.
NZD USD traders are bracing for tomorrow's CPI Report. Expectations are for a slight increase. A surprise to the downside could trigger a huge break in the market as it would lead to speculation of aggressive action by the Reserve Bank of New Zealand to stimulate the economy.
The RBNZ is not too fond of the pace it takes for an interest rate cut to move through the economy so it may be considering quantitative easing or intervention as alternatives.
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