The rally in the EUR USD is another sign that the U.S. currency is losing its luster as a safe haven currency. Optimism is building that the Euro Zone economy is getting ready to turn higher. Comments from European Central Bank President Trichet promoted some of the optimism when he suggested that the global economy had reached an inflection point. Additional support came from a suggestion from ECB member Axel Weber who said there is no need for the central bank to expand its asset buyback program.
The key to sustaining this current rally will be whether the Euro Zone production reports coming out later this week will show signs of a recovery. If production reports do not show improvements then the ECB is likely to step up its efforts to stimulate the economy. This could set a bearish tone in the marketplace.
Doom and gloom in the GBP USD yesterday turned into optimism today as three reports showed that the U.K. economy may be bottoming.
News that industrial production fell at a slower pace than estimated helped put in a bottom overnight. The bottoming action was confirmed and the market accelerated to the upside when additional reports showed better than expected results in the housing and retail sectors.
All of this good news is pointing toward a possible reduction in the Bank of England€™s quantitative easing plans. Earlier this week reports were circulating that the BoE would have to step up its efforts to stimulate the economy through the purchase of government bonds. Last week the BoE even purchased more bonds following the release of its interest rate policy announcement. Now that it looks like the economy may be bottoming, the BoE may get a chance to take a break to allow its previous quantitative easing moves to take effect.
Stronger commodity markets helped to support the Canadian Dollar. Gains were limited however as the stock market was under pressure throughout the day.
Lately the Canadian Dollar has been moving in lock-step with the U.S. stock market. This could cause problems with the currency if the equities fall as many analysts are predicting. One key to sustaining the rally is for this currency market to begin focusing on a recovery in the Canadian economy. Gains in crude oil and industrial metals will help to improve the export picture, but investors really want to see guidance from the Bank of Canada that the economy is truly on the road to recovery.
The strength in the Japanese Yen may be reflecting the possibility of a break in the global equity markets. Yen traders sensing that the stock markets may be topping have been buying back Yen as they exit from the equity markets.
A portion of the rally in the equity markets has been funded by the carry trade. This is a strategy in which investors borrow the lower yielding currency to invest in the higher yielding currency. As the stock market rose, traders were borrowing Yen to invest in equities. Now that the stock market appears to be overvalued, investors are lightening up on these leveraged positions and sending the money back to Japan.
Swiss Franc investors frustrated by the low yields in the U.S. markets are repatriating in an effort to get better returns elsewhere. The recently reported improvements in the U.S. economy and the results of Fed€™s bank stress tests have settled the U.S. markets and reduced demand for the U.S. Dollar as a safe haven currency. As long as this economic scenario exists, continue to look for higher markets to follow.
The only surprise would be an intervention by the Swiss National Bank. If the SNB sees that the higher Franc is hurting demand for Swiss exports then they will act accordingly to push the Swiss Franc back down to a more acceptable value.
The AUD USD was able to post a strong gain on Tuesday despite a report that the economic contraction will last until at least June 2010. Traders also ignored the news that the budget is expected to show a deficit until 2016. The fact that the market rallied only proves that investors are chasing yield at this time and not paying too much attention to the economy.
Technically the trend remains up with more upside potential. The charts indicate that the rise in the market should run into resistance at .7928.
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