The Wall Street Journal in its weekend edition speculated that the Bush administration was waging a battle for international support to put a floor under the U.S. Dollar.
This was very similar to our April 17 report called Verbal Intervention Puts Short-Term Top in Euro. Now almost a month and five handles lower in the Euro, The Journal is writing that the initial support for the Dollar’s bottom may have come following the April 11 Group of Seven meeting. At that time, if you recall, the G-7 made a change to its official statement for the first time since 2004.
This change in the G-7 statement was the first sign that the Euro had reached a critical level. Excess volatility was cited by central bankers as well as concerns about what the soaring Euro was doing to Euro Zone exports. About the time of the G-7 announcement, the Treasury Bonds accelerated to the downside, pushing up interest rates and narrowing the spread between Bunds and Bonds.
With this kind of support, it is becoming clear that the break in the Euro may be part of a developing long-term trend. An additional signal that the trend may be turning in the Dollar was found in the release of the April 29 Commodity Futures Trading Commission Commitment of Traders report. In this report, hedge funds and large speculators have turned net long for the first time since December 2005.
Based on this knowledge, it appears that a long-term top may be forming in the Euro. From the technical side, however, chart watchers should note that markets rarely turn quickly from long-term bullish to long-term bearish. Short-term technical traders should note that the Euro has yet to retrace its break from the top to set up a secondary lower top.
With Trichet of the ECB still hawkish on interest rates, and the FOMC expected to hold rates steady at its next meeting on June 25, the Euro may trade sideways-to-higher until then before the long-term trend takes over and the next down leg resumes.
Fundamental traders should continue to monitor reports out of the Euro Zone regarding consumer/business confidence and economic reports. Any series of weak economic reports may shift the ECB's tone regarding interest rates from hawkish to dovish.
The conclusion is to play both sides of the market until there is a sign that the bulls are ready to add to their commitment to the long-side of the Dollar. The EURUSD may stay locked in a range between 1.60 and 1.52 until either one of the central banks makes the next move regarding interest rates.
With a possible long-term down trend set in motion, look for the next selling opportunity in the EURUSD after a retracement back to at least 1.5620.
Soaring Stock Market Attracts Risk Takers
The tone in the USDJPY was firm on Monday as the bullish stock market attracted more risk takers. Traders sold the Yen and bought Dollars which were poured into the stock market.
Following last week's break in the U.S. stock indices and subsequent break in the USDJPY, this pair has reached a critical short-term retracement level. If the USDJPY fails to make a new move high on this rally, then a secondary top may be formed which could trigger an even sharper break than last week. Tuesday and Wednesday are critical days to watch for a failure of this rally due to the release of Retail Sales on May 13 and the CPI on May 14.
The key resistance area which may stop the rally is 104.21. If this fails, then a new leg down to 100.72 is possible.
USDCAD Traders Shift Focus to Strengthening Canadian Economy
The USDCAD traded lower on Monday as traders shifted their focus from the crude oil market to the Canadian economy. A government report showing housing prices rose in March equally the pre-report forecast carried more weight than the weaker crude oil market.
This new report combined with last week's bullish employment report which showed employers added more jobs than expected in April has combined to show that the Canadian economy may be pulling out of its downward spiral.
For several months, the pair has been trading inside of a tight range. An improving economy coupled with higher crude oil could prove to be bearish for the USDCAD.
Strong U.K. Producer Prices May Be Signaling End to Interest Rate Cuts By BoE
All it took was one strong economic report to shift the U.K. financial markets from anticipating another round of interest rate cuts to trading like the rate cuts were over.
Lately the GBPUSD has been plunging with the Pound hitting a three month low. Traders have been seeing weakness in the economy and the possibility of another rate cut by the Bank of England as the catalyst for the break.
Given the oversold conditions and the bullish Producer Prices, the strong rally on Monday, although mostly short-covering, may give the BoE a strong reason to leave interest rates alone.
Slowing Economy Provides Support for Aussie and Kiwi
Reports out of Australia and New Zealand gave traders a strong sign that the economy may be slowing down. This news was interpreted as a sign that their central banks may not have to raise interest rates.
The news out of Australia was a better than forecast home loan approval number. The report showing home loans falling was a sign that the economy was not heating up as fast as expected. It is also a sign that the recent series of interest rate hikes up until March were working to hold down the economy.
Consumer Confidence fell once again in New Zealand. This was judged as a sign that the economy was slowing down and that rates would not have to be raised.
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