An unexpected rise in U.S. pending home sales surprised the Forex markets, weakening the Dollar from start to finish of the New York trading session. The release of the data triggered a strong appetite for more risky assets and sent the Dollar lower.
In addition to the friendly report, the Dollar was weakened by news of additional stimulus plans from the Bank of Japan and the Reserve Bank of Australia. The central bank activity provided optimism for traders who were willing to lighten up on their low-yielding investments priced in U.S. Dollars.
The Euro rallied on the friendly U.S. pending home sales report, but overall, market participants kept activity at a minimum ahead of the European Central Bank meeting on February 5.
Euro investors are still not sure what the ECB will do at its meeting. Based on ECB President Trichet's comments, some traders expect interest rates to remain unchanged at 2%. However, recent economic reports suggest that the ECB may have to cut rates by as much as 75 basis points. Last night the Euro Zone producer price index showed a drop of 1.3%. This decline was bigger than forecast. German Retail Sales also fell leading some traders to believe a rate cut will have to be made.
British Pound traders shrugged off a report of weakening construction spending and news of a downgrade of Barclays' long-term debt and posted a gain on Tuesday. GBP USD traders were mostly reacting to the better-than-expected U.S. Pending Home Sales Report which gave the housing market a shot in the arm.
Bulls are still leery that the recent bottom will last while most of the buying has been deemed short-covering. Continue to look for opportunities to short on rallies until the main trend turns up on the daily chart. Traders may lighten up on activity tomorrow as they await the results of the next Bank of England meeting. Traders are looking for a 50 to 100 basis point cut.
The USD JPY traded higher on Wednesday as traders abandoned the U.S. Dollar following the announcement of a better than forecast U.S. Pending Home Sales Report.
The initial support in the Japanese Yen came from unexpected central bank activity. The Bank of Japan provided a boost to the Yen when it announced that it would buy listed shares of stock held by Japanese financial institutions. This move provided some optimism to the Japanese market and also made more cash available with which to work.
The rally in the Yen is not expected to last too long as traders still fear a BoJ intervention if the price of the Yen gets too high.
The Canadian Dollar posted its first gain in about a week after better than expected U.S. housing market news helped revive demand for commodities. Higher commodity prices are expected to give the Canadian export market a boost. Appetite for more risky assets also increased as the U.S. Dollar lost a little of its luster as a safe haven asset.
Traders should note that today’s rally does not change the trend. The Canadian economy still remains weak and is expected to continue to feel pressure until the global economy turns around. Falling exports and a narrowing trade surplus will only get better if the global economy improves. Most of all, crude oil prices have to start to rise. This will help relieve some of the pressure.
Tuesday's rally may be short-lived as traders may begin to lighten up positions ahead of Friday’s U.S. and Canadian unemployment reports.
The USD CHF fell sharply as the Dollar lost some of its luster as a safe haven and Swiss traders sought better yielding assets. The Dollar weakened throughout the day following an early morning report showing that Pending Home Sales unexpectedly rose. The surge in the Swiss Franc came after the U.S. equity markets rose substantially late in the day.
Like the other Forex markets, the move on Tuesday does not represent a change in trend. It looks as if it was built on emotion rather than on an economic foundation. The Swiss economy is still in a contraction and the Swiss National Bank may intervene if prices get too high. Continue to look for opportunities to get short.
The Australian Dollar rose after the Reserve Bank of Australia cut interest rates by 100 basis points. The move by the RBA was in line with trader expectations so the market never really had much of a reaction to the downside as the cut was already priced in.
Traders seemed to be more focused on the new Australian financial stimulus plan. This new aid package was modeled after a similar successful plan launched last October. Despite the euphoria over the new plan, the Australian economy still needs higher commodity prices and an increase in exports. A strong stock market will not hurt either.
The New Zealand Dollar showed a little strength on Tuesday on the heels of the Australian interest rate cut and stimulus plan. The rally today in the NZD USD was short-covering and a few aggressive bottom-pickers. There is nothing to indicate that the down trend is ready to turn. Weak exports and lower commodity prices are still capping gains in the economy. A rally in the stock market may trigger more short-covering in the short-run as traders will increase their appetite for higher yielding currencies.
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