U.S. Leading Indicators unexpectedly rose in April prompting traders to sell the EURUSD, which had just changed trend to up on May 16. Today's action erased some of the doubt about the U.S. economy raised last week due to poor economic numbers.
The Leading Indicators showed an advance of 0.1 percent for a second month, which was better than the forecast. This is a key indicator for the U.S. economy as it generally shows the direction of the economy for the next 3 to 6 months.
In other news affecting the longer-term trend in the Euro, the Bank of France reported that the French economy in the second quarter will expand at half its pace of the first quarter of 2008. The country's index of manufacturing confidence fell to the lowest level in more than two years.
This report indicates that the European economy may be slowing down. France represents the second largest economy in the Euro Union next to Germany, so this is major news.
It looks as if the Euro may stay in a 1.52 to 1.56 range until more information about the European economy becomes available or until the ECB changes its commentary from hawkish to dovish.
Also of note, the recent CFTC's commitment of traders report showed that net shorts fell in the Euro futures market. This is just another sign that institutions and hedge funds are beginning to believe that the Dollar has bottomed out.
Traders should watch the interest rate differential between the Bund and the Bond as to clues pointing to the Euro's short term direction. As the interest rate spread narrows, U.S. assets will become more attractive, prompting more Dollar buying.
The best scenario for the Dollar will be a continuation of better-than-expected U.S. economic reports, in conjunction with a Euro Zone economic slowdown.
USDJPY Firms on Leading Indicator Strength and Stronger Stock Market
USDJPY Traders forgot about last week's economic uncertainty which led to heavy Yen buying and instead focused on the strength of the U.S. Leading Indicators report. This report, which gives a three to six month outlook, appears to be more attractive to long-term traders who prefer the long side.
Speculators also bought the Dollar and sold Yen to help fuel the stock market rally on Monday. Given confidence because of the leading indicators report, the risk appetite for U.S. assets increased.
Technically, the pair is in a range with 105.43 and 105.71 as two key tops. On the downside, 102.56 is support. The longer the market stays in this tight range, the bigger the move.
USDGBP Retraces into Sell Zone
The strength in the Dollar put more selling pressure on the GBPUSD on Monday. Traders had rallied the Pound in a counter-trend move into a major retracement area which attracted the selling.
Technical buyers are still supporting the GBPUSD in front of three major bottoms at 1.9360, 1.9336 and 1.9181. The reversal bottom at 1.9362 on the May 14 daily chart is also an important price.
The market also made a weekly reversal bottom last week which will not be negated unless 1.9362 is violated. Based on today's top, the market has to hold a 50% to .618 retracement of this first rally from the bottom. If it does, then the pair will try to change the trend to up.
If the cluster of bottoms fails to hold, then significant damage will be done to the charts, and the Pound may go into a severe long-term downtrend.
The fundamentals are still bad for the U.K. economy due to poor housing numbers, but there is talk of inflation heating up which could force the Bank of England to leave interest rates alone.
As Appetite for Risk Increases, Traders Buy USDCHF
Traders bought Dollars against the Swiss Franc on Monday as the U.S. stock market rallied on news that the economy may be looking better three to six months down the road.
The USDCHF is in an uptrend, but range bound. The market has to breakout over 1.0625 to reaffirm the uptrend. Another failure at this level could force longs out, triggering a potential break to 1.0389. A failure to hold this level turns the main trend to down and could trigger a sharp break to 1.0256.
Firm Crude Oil Keeps Pressure on USDCAD
The USDCAD remained weak as firm crude oil prices helped support the Canadian Dollar. Strength in wheat and gold could also attract new selling pressure to the greenback. The combination of higher commodity prices and an improving Canadian economy have proved bearish for the USD against the Canadian Dollar.
Technically the market broke through support at .9945 and attracted more selling pressure. Look for more downside until the market can regain this price level.
AUDUSD Continues to Rally
The AUDUSD rallied to another 24-year high. There is now talk that traders will try to drive this market to par with the Dollar.
Look for support at the old main swing tops at .9510 and .9544.
Commodity exports account for a large percentage of the Australian economy so the higher the crude moves, the more likely the uptrend in the Aussie is going to continue. Higher gold prices have also been supportive. If volatility gets too high, then expect to see a comment from the Reserve Bank of Australia concerning a possible surprise rate hike.
Threat of an Interest Rate Cut Caps NZDUSD Rally
Two days after posting a reversal bottom on the daily charts, the NZDUSD reached a retracement zone and met heavy selling. The first objective at .7736 was met on Monday, and traders sold on the notion that nothing has changed in the economy to support a rally.
Throughout most of the day, stories floated that BlackRock, Inc. had sold over $1.4 trillion over the past month because of the weak New Zealand housing market and higher unemployment. Traders jumped on the short-side because of this news and because of renewed talk of another interest rate cut.
The trend is still down, but aggressive counter-trend traders may start some light buying at 76.40.
Please do not hesitate to contact us at 800-971-2440, with any questions.
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