The EUR USD traded weakly early in the trading session as negative news from last week regarding the worsening Euro Zone recession weighed on the market overnight. Traders were selling the Euro as pessimism was taking over the market. Concern over the size of the Euro Zone contraction was the main cause of the shift in investor sentiment.
Right before the New York opening, the U.S. Dollar began to weaken as the global equity markets began to turn from negative to positive. It was also as if a light bulb had gone off as traders quickly put risky trades back on again. This led to a strong short-covering rally initially but new buying may have supported the market late in the trading session.
Technically, the Euro confirmed last week's closing price reversal top with a follow-through break overnight but failed to close lower. The downside target of 1.3299 is still possible, but this pair has to hold a retracement to and attract new selling at 1.3572 to 1.3607.
The British Pound acted strong all day and in fact has performed the best versus the U.S. Dollar over the past five days. Part of Monday's rally was fueled by an article stating that the weaker British Pound is making U.K. real estate an attractive investment. Additional support for the rally came from the desire to buy more risky assets because of the huge turnaround in the global equity markets right before the New York opening.
The GBP USD closed lower last week after posting a new move high at 1.5351, but there was no follow-through break to the downside on Monday to confirm the weekly reversal. The potentially bearish topping formation created last week will be negated if this pair trades thorough last week's high.
The tight, sideways action the last five days had been indicating uncertainty over the economy, but Monday's close on the high puts this pair in a position to break out to the upside..
A turnaround in global equity markets early Monday morning triggered a higher opening in the Canadian Dollar while putting pressure on the U.S. Dollar.
Traders pressured previously initiated long positions in the USD CAD throughout the day as it became clearer that the growing demand for more risky assets was not going to diminish. Additional support came from the sharply higher crude oil market. Improved prices in the crude oil will lead to better Canadian export numbers.
Last week the USD CAD posted a closing price reversal bottom. On Monday this pair confirmed the bottom but buying quickly dried up and the market closed lower for the day. The weekly charts are showing a potentially bullish pattern which indicates the possible start of a 2 to 3 week rally. Based on the developing chart pattern, look for a minimum rally to 1.1991 to 1.1869. The bullish outlook will be negated if the bottom at 1.1474 gets taken out. The daily chart indicates that the retracement of the first leg should stop at 1.1644 to 1.1603. If buyers come in after a successful test of this retracement then look for the start of a huge rally.
The strong surge in the equity markets on Monday helped to support a rally in the USD JPY. There is no doubt that a huge portion of this rally was being fueled by the renewal of the carry trade. This is a trading strategy whereby investors borrow the cheaper currency and convert the proceeds to higher priced assets. If the equity markets continue to mount strong rallies, then look for more pressure on the USD JPY.
Traders noted that a statement by the Bank of Japan may have been the catalyst for the early weakness in the Yen which led to rally. The BoJ stated that it is concerned about the volatility in the Yen and the effect its recent rise will have on the economy. This statement amounts to a verbal intervention. Whether it turns into a real intervention or remains a threat, investors are selling the Yen to buy higher risk, higher yielding currencies.
Last week the trend turned up on the weekly chart in the June Japanese Yen. Based on this bullish chart pattern, the next upside target is 1.0689. The overnight top failed to reach this number. The chart pattern is now suggesting that a break to 1.0303 to 1.0237 is likely.
Risk takers controlled the currency markets on Monday. Monday morning's strong surge to the upside confirmed last week's USD CHF closing price reversal bottom at 1.0976. Based on the developing short-term pattern, look for a minimum break back to 1.1121 before the uptrend continues. Swiss traders are repatriating funds in an attempt to capture a yield higher than U.S. government debt is paying at this time.
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