A surprise decline in crude oil inventories led to a reversal to the downside in the U.S. Dollar on Wednesday. Crude oil rallied sharply higher triggering rallies in the equity and currency markets on the notion that trader demand for higher risk assets would increase.
Higher equity and energy prices helped the EUR USD gain ground throughout the day in a combination of short-covering and fresh buying. Many Euro traders had been leaning to the short-side prior to the crude oil news due to a sell-off in the Chinese stock market overnight. This weakness helped create a risk adverse environment and traders were selling in anticipation of less demand for higher risk assets. The bullish news regarding crude oil inventories caught early sellers by surprise forcing them to cover their newly initiated short positions. The main trend is down on the daily chart. Without a follow-through rally overnight or tomorrow expect the trend to continue down.
Stronger equity and energy markets helped weaken the USD CAD. The U.S. Dollar was trading better against the Canadian early in the trading session, but the bullish crude oil news forced weaker USD CAD longs out of the market. The next two days will determine if the trend is turning back down or if today's action was an aberration.
Stronger demand for equities helped boost the higher yielding AUD USD and NZD USD. The rally in these two markets appears to be short-covering in reaction to a hard rally in the crude market due to 0bullish inventory news. Today's action may have been the test of last week's highs in these two markets.
The GBP USD erased much of this morning's early losses when equity and crude oil markets took off to the upside. Overnight the pressure was on the British Pound following the release of the minutes from the Bank of England policy meeting on August 6th. This news created a bearish stir because it showed that BoE Governor Mervyn King was looking for a greater increase in quantitative easing than was eventually agreed upon.
The giveback in the Forex markets late in the trading session may be an indication that today's action was just an aberration as nothing was done to actually change the trend. The action over the next two days will dictate whether the Dollar will continue to gain strength or start on another leg lower.
Please do not hesitate to contact us at 1-800-971-2440, with any questions.
DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and is not suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from Brewer FX, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.