The strong recovery in the U.S. Dollar late in the week and the inability to break it sharply lower could be a sign that a short-covering rally is imminent. Rumors that the Fed may begin to raise interest rates earlier than expected, a poor U.K. economy and fear of intervention all helped boost the Dollar on Friday.
The uptrend continued on the daily USD JPY chart as rumors swirled that traders are betting the Fed will raise interest rates sooner than expected. Traders who sold Dollars and bought Yen when U.S. interest rates became the lowest in the world are not being forced to buy back their positions. This is helping to boost the USD JPY. There will come a point when the Yen once again becomes the world's carry trade. The Dollar should rally substantially and equities should break hard when this occurs.
The GBP USD erased all of this week's gains on Friday following the release of a report which showed that the U.K. recession is continuing. Traders had been betting that the 3rd Quarter GDP would show that the U.K. economy was expanding itself out of the recession. In addition, recent comments from a Bank of England official hinted that the BoE would end its asset-purchase program early. Today's GDP news forced traders to rethink those positions which led to a massive sell-off. Look for the liquidation to continue into next week as it is clear that the BoE is going to leave its benchmark interest rate at very low levels for a prolonged period of time. The poor economic number is also a sign that the BoE is not in a position to end its stimulus program either.
The EUR USD traded several times over the $1.50 barrier before eking out a small gain above it on the close. The bulls are trying to establish support at this price while maintaining an orderly rally. Too much volatility and excessive speculation will drive this market higher and invoke the ire of the European Central Bank. The ECB is growing concerned about the rapid rise in its currency and the possible negative effects the price rise has on Euro Zone investments. The ECB is expected to continue to make verbal attempts to push keep its currency from running away to the upside, but a sustained rally over $1.50 is expected to draw a more aggressive response. This is why traders are shying away from the Euro at current levels.
Look for gains to be limited in the USD CHF or even downside pressure if stories are true that the Swiss National Bank is ending its currency selling program. Since March the SNB has been systematically selling Swiss Francs in order to prevent a deflationary scenario from developing. Recent reports show the economy expanding and inflation reaching more normal levels. This should help stabilize the Swiss Franc or perhaps even trigger a rally.
Weaker equity markets and lower crude oil helped keep pressure on the Canadian Dollar on Friday, but the story of the week remained Bank of Canada and government official concerns about the rapid rise in the currency. Last week it was Canadian Prime Minister Harper who expressed his concern about the value of the currency and its possible negative effect on the economy. Earlier this week the Bank of Canada said the rally in the currency wiped out recent economic gains.
On Friday, central bank Governor Mark Carney warned that the currency was too strong. In a statement he said that investors had lost their focus on the central bank's mandate to keep inflation at 2%. He also added a stronger verbal intervention comment when he hinted that more serious action is an option. This doesn't necessarily mean an actual intervention but could be something as simple as leaving interest rates low for a prolonged period of time. All of this adds up to the possibility of a prolonged recovery in the USD CAD.
Diminishing demand for higher yielding assets helped pressure the AUD USD and NZD USD late in the week. Although lower equity prices helped keep a lid on price further price appreciation in the Australian Dollar and New Zealand Dollar on Friday, China is still on the mind of traders. Last week China reported a robust GDP figure of 8.9%. Although this was less than estimates, it still indicated the economy was heating up. Because of this sharp rise, rumors are circulating that the Chinese government is considering ending its stimulus program early. Aussie and Kiwi traders are concerned that their exports will suffer and their economic expansions may slow if China slows down its economy. Technically, both of these currency pairs are overbought which is an additional reason why they are both likely to feel downside pressure over the near-term.
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