Traders bought Dollars in a big way on Thursday, as the consensus is that the Fed is done reducing rates. On Wednesday, traders were tentative to put on aggressive positions, as the Fed language following its latest interest rate cut was unclear as to what its intentions were going to be the rest of the year.
The Dollar rally started early in the morning when the March ISM Manufacturing Index came out slightly better than expected. Another favorable number next month will be a sign that the economy is not deteriorating as fast as assumed earlier in the year.
The chart picture also turned negative on Thursday as the EURUSD trend turned down on the daily chart for the first time since late January 2008. The charts indicate the potential for a break down to 1.52, although the Euro may be subject to periodic short-covering rallies.
Traders have to keep in mind that this is just the beginning of a possible change in the long-term trend in the Euro. The actual spread between the Euro Zone and Fed Fund rates still favors a stronger Euro. The U.S. treasuries are selling off which means the interest rate spread between the U.S. bond and Euro Zone bund is narrowing. This is what is driving the Dollar higher in the short run.
Continue to monitor the U.S. treasuries for direction.
On Friday, the focus shifts to the U.S. Non-farm payroll number. Pre-report estimates are for a decline of 78,000 jobs. The market will be watching to see if the economy improved at all and by how much. This report will also be a key inflation indicator. Traders would like to see some growth, but not so much as to fuel an inflationary blip.
The GBPUSD fell as traders are still anticipating another interest rate cut by the Bank of England. If the Fed decides to leave rates alone while the BoE lowers rates, the widening of the interest rate differential will favor the Dollar.
On Wednesday, the BoE sent out a signal that the credit crunch might be over. In addition, the Chartered Institute of Purchasing and Supply showed a strong gain in its factory-price index. Although this was good news for the Pound, it was not enough to overtake the buying strength in the Dollar. The Pound did gain against the Euro. This action helped the Dollar gain against the Euro.
The interest rate spread indicates the Dollar should gain over the Pound in the short-run.
The USDCAD rallied sharply higher because the market is anticipating another rate cut by the Bank of Canada and crude oil prices tumbled.
With the Fed expected to keep interest rates at 2% and the BoC expected to cut at least one more time, traders sold Canadian Dollars because of the widening interest rate spread. This trend should continue over the short run.
The Canadian Dollar also sold off on the weakness in the crude oil market. For weeks, the CAD had been propped up by a strong energy market as the Canadian economy relies on exports of crude oil. Thursday's big break in crude accelerated the USDCAD to the upside. If the Dollar is bottoming and money is flowing out of commodities, look for this trend to continue with the USDCAD breaking out to new high for the year.
Signals are mixed in the AUDUSD and NZDUSD. Traders have been holding the Aussie steady to higher over the past two weeks in anticipation of another rate hike by the Reserve Bank on June 3. The overall weakness in commodity prices may drive the Aussie lower as the Australian economy relies heavily on commodity exports.
The lack of consumer confidence and lower commodity prices is bearish news for the New Zealand Economy. Continue to look for weakness.
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