Over the weekend the Group of Seven said very little to prop up the U.S. Dollar. In its first major revision to its statement since 2004, the G-7 expressed concern about sharp fluctuations but did not specifically mention strengthening the Dollar through intervention. The statement was not very convincing to Euro Bulls although there was an initial knee-jerk reaction up in the USD on Sunday nights opening.
The statement is still being analyzed by traders. While not specifically mentioning the price level of the Dollar, some believe that this is the initial stage of a verbal intervention. Based on the way that the EURUSD finished, traders decided that the statement was not strong enough to trigger widespread selling in the Euro.
For the second time in less than a week the issue of exchange rate volatility came up. Late last week it was Trichet from the European Central Bank expressing concern about currency volatility and now it's the G-7's turn. They seem to be getting a trending market confused with volatility. Long traders have driven this market higher in a smooth trending fashion without so-called volatility. Not until there is two-sided rhetoric from the ECB does the volatility it speaks of even appear. Taking a side against non-existence volatility has not done anything to the strong uptrend in the Euro. Until Trichet, the ECB or the G-7 make harsh official statements against the price level in the Euro does there even stand a chance of a top being made. The G-7 had the best chance to express concerns about the level of the Euro but chose not to. Until there is a statement regarding or action because of the price level of the Euro, look for higher markets to follow.
The action from the Fed and the ECB is dictating the future direction of the EURUSD. The Fed is poised to keep lowering interest rates because of the U.S. economys slow growth while the ECB will continue to leave rates at 4.0% while there is still the threat of inflation. Until the interest rate differential tightens between these two economic powerhouses, expect the Euro to remain firm.
There are some big money players committed to the long side of the Euro. Monday's strength indicates that it is going to take more than a lame statement regarding volatility in foreign exchange rates to turn the Euro lower.
Inflation in the U.K
Inflationary issues in the U.K were raised on Monday after the Office of National Statistics said that British producer prices climbed 6.2 percent in March. The news immediately caused a short-covering rally as traders lightened up on their short positions.
Bearish GBPUSD traders had been aggressively shorting the Pound in anticipation of further interest rate cuts in June and July following last weeks Bank of England cut to 5%. Consumer prices are expected to show a similar rise in a report released on Tuesday. Once again the focus is on interest rates. If the Bank of England keeps receiving reports which threaten to fuel inflation, they are not going to cut rates as aggressively as short traders would like to see them. This should be looked at as a short-covering rally as there is no sign of a large commitment to long Pounds due to the credit crisis and the weak U.K. housing market. More rate cuts are expected later in the year while these financial issues work themselves out. Monday's report just means that the Bank of England may be able to skip a cycle before initiating the next round of cuts.
U.S. Stock Market Controls Short-term Direction for Swiss and Yen
Once again the focus in the USDCHF and USDJPY was on the U.S. stock market. As long as there is downside pressure on these markets expect some firmness to develop in the Swiss and Yen. Traders seem content with keeping these pairs inside a tight range. The tighter they wind this range, however, the more volatile the impending breakout. The direction of the breakout will all depend on whether the U.S stock markets resume the uptrend or turn the trend down.
Mitsubishi Financial Group posted a revenue decline on Monday indicating that the Japanese economy has not been immune to U.S. sub-prime problems. Traders should watch the USDJPY for indications that the U.S. mortgage collapse is spreading to a wider group of banks in Japan. Quarterly reports from Citibank and Merrill Lynch this week will give some clues as to how deep the crisis has affected the Japanese financial markets.
Commodities Provide Short-term Support for Canadian Dollar
Last week Canadian Dollar traders ignored the rise in crude oil to focus on the weakness in the Canadian economy thus leading to a weekly decline in the currency. On Monday, however, traders sold USDCAD as traders returned their focus to the strength in the big three Canadian exports crude oil, wheat and gold. A stronger stock market also helped bolster gains. Like the rally in the Pound, this move is expected to be short-lived as the Bank of Canada is expected to cut rates by 25 bp on April 22.. Statements out of the BoC expressed concerns that the U.S. economic recovery is expected to go slow. Long term traders should look to sell based on the interest rate differential while short-term traders should buy as long as commodities remain firm.
Risk is to the Downside in AUDUSD and NZDUSD
The G-7 statement looking for a slowdown in global economic growth put downside pressure on the AUDUSD and NZDUSD early in the trading session before profit-taking and short-covering led to a higher close. The G-7 now joins the IMF which last week also increased the chances of a global recession to 25%. Since Australia and New Zealand rely so much on global buyers of their exports, this could be bad news for the long-run.
Traders are playing the long-side cautiously in both pairs as the appetite for risk has waned while the U.S. economy attempts to gain its footing. Additionally, comments from the Royal Bank of Australia last month regarding the future of additional interest rate hikes has topped out the AUDUSD. Interest in the long side is going to have to come at a much lower price level. Look to sell rallies against the double-top formation.
The lack of consumer confidence is the most bearish factor in New Zealand. Monday's poor Retail Sales report is further evidence that the NZDUSD is poised for more downside.
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