Trading was light and thin in the Forex markets today as some money centers in both Asia and Europe took an extra day off following the Easter holiday weekend. Those who decided to trade had their way versus the Dollar as there was really no major financial institution to put up any resistance.
The key factors driving the markets this week will be U.S. economic reports and banking stocks. Traders will increase their desire for higher risk assets if both the economy and the stock market post gains.
Since early March equities have been rallying and the Dollar has been dropping on speculation that the U.S. financial system is sound and that the economy has bottomed. Now that a month has passed traders will be looking for solid evidence of these two events. Both of these factors will dictate the Dollar's direction this week.
The Euro traded higher versus the U.S. Dollar throughout the trading session. Thin trading conditions in Europe because of the extended Easter holiday allowed traders to have their way with the Euro as apparently there was no stopper in the market today.
Late last week the Euro felt downside pressure from comments by European Central Bank President Trichet who said that interest rates have room to fall and that the ECB is open to non-standard forms of easing.
Despite these bearish comments, short-covering prevailed today as traders were evening up positions ahead of tomorrow€™s U.S. PPI and retail sales reports.
British Pounds traded higher on Monday on thin trading conditions. The New York session started higher following an overnight rally that appeared to be short-covering ahead of U.S. economic reports due to be released later in the week. Today, there was really no important economic information by which to trade.
Fundamentally, this market is expected to feel downside pressure over the short-run. The U.K. economy is still bearish and the Bank of England is in line for another round of quantitative easing.
Increased appetite for risk may help support the British Pound, but eventually traders will want to see bullish changes in the economy. If this doesn't occur, then look for the focus to shift back to the safety and security of the Dollar.
Canadian Dollars opened lower on falling crude oil and a weaker stock market but turned around as the day continued and stocks and oil rallied. Trading was thin because of the lack of government reports today.
Traders seem to be waiting for tomorrow's U.S. PPI and Retail Sales reports. Traders are also waiting for confirmation from the U.S. banking sector that last week€™s announcement of bullish guidance from Wells Fargo reflected real numbers. Investors are looking for similar results from other major banks.
Industrial metals such as platinum and copper should continue to provide support for the Canadian Dollar, but traders should be careful using crude oil as a bullish economic indicator. The supply and demand numbers in the crude oil market do not support a rally in crude at this time which is why it is not a bullish factor for the Canadian Dollar.
Weaker equity markets led to a higher opening in the Japanese Yen this morning. Thin trading conditions today helped the market but for the most part trading was lifeless.
News that the Japanese PPI fell to a seven-year low is raising concerns over the return of deflation. Earlier in the month the Bank of Japan Tankan Survey showed weakness in manufacturer expected costs. This news is leading to expectations of downward spiraling inflation led by eroding corporate profits and lower wages.
As long as the Japanese economy remains under pressure then look for more downside. Last week's stimulus plan announcement was most likely not enough to turn the economy around in the short-run.
Swiss Franc traders took profits after last week's sharp selloff. Early weakness in equity markets is also providing support.
Last week the Swiss Franc was under pressure following the appointment of Philipp Hildebrand as the new leader of the Swiss National Bank. News of the new appointment hasn't been the only factor driving the Swiss Franc lower. Reports are surfacing that the recession is also triggering an increase in corporate bankruptcies.
Finally, the SNB can't cut interest rates anymore, but that doesn't mean it won't try to influence the price of the Swiss Franc. Look for more intervention and quantitative easing as the SNB battles deflation.
News that China may make additional contributions to its stimulus plan is leading to speculation that they will demand more goods and services from Australia. This along with greater investor appetite for risk helped the AUD USD gain on Monday.
A rally in the Australian Dollar for speculative reasons is looked down upon by the Reserve Bank of Australia but a rally triggered by an economic recovery may encourage the RBA and keep the RBA from cutting interest rates next month.
The NZD USD posted a strong gain on Monday spurred by speculation that China may begin shopping some of its additional stimulus money. Speculators were encouraged by the news and started buying the New Zealand Dollar in anticipation of a jump in exports.
The rise in the New Zealand Dollar because of potential improvement in the economy is expected to take pressure off the Reserve Bank of New Zealand. Traders had been pricing in an additional rate cut by the RBNZ at its next meeting on April 30. Now that there are signs that the economy may recover on its own, the RBNZ may back off of another rate cut. This news could provide further support along with a rise due to increased trader appetite for risky assets.
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