Higher crude oil, a weak stock market, and a possible 50 bp cut by the Fed on April 30 combined to drive the Euro higher on Wednesday. With the European Central Bank expected to keep rates at 4% and the Fed expected to lower rates to 1.75%, bullish EURUSD returned to the fundamental interest rate differential equation and bought Euros with confidence. While the Fed talks about recession, the ECB addresses inflation. The two economies could not be more opposite than they are now. The fundamentals as well as the technicals support the Euro's strong uptrend. It seems that it is not a matter of if the Euro trades at 1.60, but when.
The European Central Bank makes its interest rate policy announcement on April 10. It are expected to leave rates unchanged. The language is expected to be hawkish as Trichet remains firm in his quest to squash inflation. The isolated report indicating a possible slow down in the Euro Zone economy could not be followed up with additional weak reports. Until the bearish news starts to trend, expect the Euro to push toward a new all-time high.
The International Monetary Fund also provided bearish fodder against the Dollar by stating it will cut its U.S. growth forecast and even suggested the Dollar was somewhat on the strong side. My question is: why so late with the report?
Later this week the Group of Seven nations meet on April 11. They are supposed to announce no action on either side of the market at this time. So far traders have accepted this pre-announcement guess, however, renewed volatility in the Euro coupled with a new high breakout, may force the Group of Seven to reconsider an intervention.
The UK economy was dealt another blow as Consumer Confidence fell to its lowest level in almost four years. The brunt of the weakness was felt in the EURGBP trade as an overbought GBPUSD market triggered a short-covering rally.
The Bank of England is expected to cut rates today by 25 bp. Like the U.S., the BoE is going to have to take a stronger stance against the decline in housing prices. Any further weakness detected in the housing market will likely call for more cuts throughout the year.
Both the USDCHF and USDJPY traded sharply lower on Wednesday as the break in the U.S. stock markets forced speculators to reduce their carry trade. The Bank of Japan also held interest rates unchanged at 0.5%. Japan has been relatively safe from large sub-prime write downs; however, its economy still remains vulnerable. New governor Shirakawa said growth will slow because of high oil prices. Traders should look to the short side in USDJPY if the stock markets trade sharply lower. The same scenario applies to the USDCHF. Both pairs are in a position to resume the prolonged down trend.
The long USDCAD traders ignored the new all-time high in crude oil and instead focused on the weakness in the Canadian economy. The bearish perception is that the Canadian economy is too closely tied to the weak U.S. economy. Continue to trade the long side ahead of the Bank of Canada's expected rate cut on April 22.
The AUDUSD fell as Consumer Confidence dropped in April. Several weeks ago the Royal Bank of Australia announced that no additional interest rate hikes were necessary to stem inflation. The longs liquidated that day and the AUDUSD has since sold off. The perception is that the lack of demand for high yielding assets makes holding long Australian Dollars too risky. The main trend is down; continue to sell rallies.
With business confidence in New Zealand and a lack of demand for risky assets, continue to look for lower NZDUSD prices. Sell 1-2 day rallies if given the opportunity.
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