The EUR/USD continued its rally set up by the FOMC's decision to leave rates unchanged at 2.00%. Speculators are interpreting the Fed's lack of clarity as far as future interest rate hikes as the main catalyst for this latest rally.
The bottom line is that the ECB is going to raise rates on July 3 and the Fed is going to leave rates unchanged until at least August 5. Traders are taking advantage of the Bund/Bond spread and buying the higher yielding currency.
Even an August 5 interest rate hike is in jeopardy as financial traders in Chicago have all but eliminated a possible rate increase at that time. The percentage of traders looking for a rate hike in August fell from 36% to 22%. Last week, the percentage stood at 44%. Many traders feel that based on Wednesday's non-statement by the FOMC the Fed might be unable to face the challenge of raising interest rates in light of the weak economic data and the lingering sub-prime crisis. It seems that the Forex markets have a lack of confidence in the Fed’s ability to act quickly and decisively at this time.
Technically, the EUR/USD is in a position to take out the last main swing top at 1.5844. Based on the chart pattern, the market will then have an almost clear shot at rallying to the April 22 top at 1.6019.
The USD/JPY continued to fall after yesterday's technical reversal down driven by the Fed's decision to leave rates unchanged without the hope of an interest rate hike later in the year. This lack of clarity and conviction by the Fed has spread over to the U.S. equity markets. Equity traders continue to lose confidence in the Fed's ability to stem an attack from inflation unless interest rates are hiked soon. Traders are being driven to sell Dollars and buy Yen for safety reasons, as there is no strong reason to leave borrowed money exposed to a risky asset class such as the stock market.
As mentioned yesterday, this pair's failure at 108.00 indicates that the next move down would be to at least 106.49. Based on the close and the strong downside momentum, this move may actually continue down to 104.96.
The GBP/USD rally continued on Wednesday as the upside momentum took out a pair of swing tops at 1.9801 and 1.9852 to change the main trend to up for the first time since early April. The chart pattern suggests an even further rally to 2.0027 before hitting any serious resistance. The support moves up to 1.9650.
The FOMC decision to leave rates unchanged helped support the British Pound, but it was Bank of England’s Governor Mervyn King's comment which set off the strong rally. In his statement King said, although inflation is rising now, we will ensure that it falls back to the 2 percent target. This comment implied that the BOE would not be averse to raising interest rates. It is almost the same comment made a month earlier by Bernanke when he stated that the Fed would do anything to stem inflation. This rally should continue to at least 2.00 before traders begin to see if actions speak louder than words.
The USD/CHF fell on Thursday, as risk adverse traders sold Dollars while seeking the safety of the Swiss Franc. Weakness has been building for about a week as weak economic data along with lingering financial market issues have put pressure on the U.S. equity markets. This uncertainty in the stock markets and the U.S. economy has forced traders to put money in safe haven currencies such as the Swiss Franc and Japanese Yen.
When the U.S. economy was improving and the stock market looked bullish, many traders chose to borrow Swiss to leverage their investment in equities. Now that the economic picture has turned gloomy and the stock market is in turmoil, traders have been encouraged to reduce their holdings of higher-yielding speculative assets funded by borrowed Swiss. This action has caused the Swiss to rally. Until the stock market bottoms, continue to look for weakness in the USD/CHF over the short-run.
USD/CAD rallied despite the strong Crude Oil market and weak FOMC statement. The weak U.S. stock market may have had something to do with the rally, however. Long Canadian Dollar traders may be thinking the problems in the U.S. economy may be spreading to the Canadian Dollar making it weaker.
It is pretty clear the Canadian Dollar has been commodity driven the last few weeks, but the weak U.S. economy and the bearish stock market is beginning to force traders to think that these issues may spread to the Canadian economy.
Technically, the charts indicate that the market may have put in a major top at 1.0323, although the main trend is still up. Traders also feel the inability of the USD/CAD to penetrate 1.0350 on the last rally is sign that the market has run out of buyers. Based on the last rally, the market is expected to correct back to 1.0071 – 1.0011 before new buyers step in. Counter-trend traders should look to sell rallies with exits above 1.0323.
The AUD/USD rallied on Wednesday as traders flocked to the higher yielding Aussie. The interest rate differential is still favoring the long side of the Aussie versus the Dollar. With U.S. rates left unchanged, and the future of a rate hike unclear, traders are putting their money to work at the highest level possible.
The AUD/USD is now in a position to challenge the double-top formation at .9655 (05-21-08) and .9648
(06-09-08). A break through this level could launch the Aussie on its way to par with the Dollar.
With the Fed giving no indication as to when it is going to raise rates, traders are taking advantage of the higher yield in New Zealand and parking their money in the NZD/USD. Many Kiwi traders feel the Fed move was not aggressive enough and are taking longer-term positions against it.
Fundamentally, the New Zealand economy is contracting, but that news was not enough to chase away investors as other news showed the current account deficit narrowing. Smart money is putting the New Zealand economic issues aside and is instead focusing on the interest rate differential. The only way to stop the rally is for the Fed to raise rates or the Reserve Bank of New Zealand to lower rates.
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