Traders bought Euros last week in anticipation of another round of interest rate cuts by the FED. The expectation of a widening spread between Euro Zone and U.S. interest rates triggered the largest one-week rally for the month. The strong close has the Euro in a position to start the second quarter at a new all-time high.
The string of weak U.S. economic reports last week contrasted with the strong bullish German confidence number and ECB talk that high interest rates are justified to fight inflation.
The Fed seems to be disjointed from the rest of the world's central banks. While they lower rates to fight against a recession, the rest of the world seems more concerned with fighting inflation. The exceptions may be the Bank of England and the Bank of Canada, which are battling mixed fundamentals.
There was very little, if any, bank credit news last week as the Fed's recent moves may have settled the crisis down for the time being by bringing back some stability. Several investment banks are still expected to write down a substantial amount of bad loans, however.
The strength in the currency market was in the Euro last week. The other majors struggled to reach key retracement areas. This may be a sign that the Fed's monetary policy stimulus package may be working its way through the system. Traders may be recognizing that the Fed has at least gained temporary control of the U.S. economic situation. Another view is that the threat of a coordinated intervention curtailed aggressive activity. Nevertheless, there was a noticeable difference in the trading action and the volatility of each major pair last week.
Commodity markets also traded at normal volatility, especially the gold market, which for the most part did not rally sharply higher on the Dollar's weakness. The U.S. stock markets also remained relatively stable, thereby limiting the movement in the Yen and the Swiss. Continue to monitor these pairs, as they are still sensitive to stock market movement. A hard sell-off is likely to trigger a flight to quality rally in both pairs, while a strong rally will most likely lead to selling pressure. The first day of the quarter is typically a large range day so the USDJPY and USDCHF may see some volatility on Tuesday.
The GBPUSD rallied slightly last week, but not enough to change the trend to up. For the most part, there was a choppy two-sided trade. The Pound's up days were related to the interest rate differential, while the down moves reflected UK bank issues, low consumer confidence and falling housing prices.
The Canadian Dollar lost ground to the USD, but remained inside of its 2008 range. Par seems to be a fair value at this time. The fundamentals are mixed. The bulls believe that strength in crude oil, wheat and gold will eventually rally the Canadian since the economy relies so much on commodity exports. The bears are suggesting the slowdown in the U.S. is likely to drag down the Canadian economy. The market is already factoring in a 50 bp rate cut during the second quarter. Weakness in commodities could put additional downside pressure on the Loonie.
The AUDUSD and NZDUSD are showing strength as traders demand higher-yielding assets. Additional support is being provided by the strength of the Australian and New Zealand economies. A strong gold market in particular will be supportive for both pairs. Buying seems to be consistent on the dips as few traders want to buy strength into 24-year highs. Wait for breaks to buy and continue to look at the long side.
Weekly Technical Outlook
The main trend is up in the EURUSD. The pair closed in a position to take out the old all-time high at 1.5904. On the downside, look for weakness to develop on a trade through 1.534.
The GBPUSD closed slightly better for the week. The main trend is up on the weekly chart, but down on the daily chart. This is the primary cause behind the market's indecision. The current close is inside of a retracement zone with 1.976 the major support. A breakdown through this level could put pressure on the pair.
The weekly trend in the USDJPY is down, but the weekly reversal bottom at 95.72 is still intact. The slight follow-through rally last week indicates some developing strength, but the inability to continue the rally indicates the shorts still control the trade. Look for a test of 98.37 â€“ 97.75 to provide support. Counter-trend buyers may come in at this zone. A breakout rally will target 102.15.
The USDCHF main trend is down on the weekly chart, but the reversal bottom at .9647 from the week ending 3/21 is still providing some support. A retracement zone has been tested at .9880, but no significant buying emerged. Holding this price level is the key for counter-trend buyers. If new buying triggers a short covering rally, look for a target of 1.038. A failure to hold .9880 indicates a test of the all-time low is likely.
In the USDCAD, the weekly main trend is up, but the pair remained range bound. The lower close indicates that the market is not yet ready to rally. There may be another retest of support at 1.000 - .9937. The market has to trade through 1.038 to trigger a strong breakout. Continue to look for choppy two-sided trading.
The AUDUSD is struggling at a retracement zone at .9211 - .9272. Key support comes in at .9004. This pair has to clear out .9272 to trigger a retest of the all-time high at .9496. With the main trend up on the weekly chart, look to buy dips.
The main trend is up, but the NZDUSD found strong resistance in a retracement zone at .8040 - .8081. The close was not good, and a failure to hold .7865 may cause longs to throw in the towel. Watch for weakness, and wait for a retracement to .7799 for the next buying opportunity.
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