The EUR/USD finished the week up and in a position to gain even more next week as upside momentum is building for a possible test of the all-time high at 1.6019. This rally was set up on Wednesday by the FOMC's decision to leave borrowing rates unchanged at 2.00%. Speculators are interpreting the Fed's lack of clarity concerning the future of interest rate hikes as the main catalyst for this latest rally.
With the ECB expected to raise rates on July 3, traders are taking advantage of the Bund/Bond spread and buying the higher yielding currency. Many traders feel that based on Wednesday’s non-statement by the FOMC that the Fed might be unable to face the challenge of raising interest rates in light of the weak economic data and the lingering credit crisis. It seems that the Forex markets have a lack of confidence in the Fed’s ability to act quickly and decisively at this time.
The USD/JPY continued to break sharply as money is pouring out of the U.S. stock market and into the safety of the Japanese Yen. The lack of clarity and conviction by the Fed in the latest FOMC announcement has spread over to the U.S. equity markets. Equity traders have lost confidence in the Fed's ability to fight inflation, slow growth, and a financial crisis. Traders are being driven to sell Dollars and buy Yen for safety reasons, as there is no strong reason to leave borrowed money exposed to a risky asset class such as the stock market.
The GBP/USD finished strong this week as the upside momentum took out a series of old tops and is now in a position to test 2.0027. Besides the weak and unclear statement by the Fed regarding future interest rate hikes, it was Bank of England’s Governor Mervyn King’s comments which set off the strong rally. In his statement, King said, although inflation is rising now, we will ensure that it falls back to the 2 percent target. Traders are interpreting this statement as an indication that the BOE will raise rates in the near future if necessary. With the Fed sitting on its hands, the Pound is the more attractive currency at this time.
The USD/CHF posted a big gain last week as risk adverse traders sold Dollars and bought Swiss Francs. The uncertainty in the U.S. stock market, the weakening U.S. economy and the crisis building in the financial markets has caused traders to rethink their risky assets plays for the safety of the Swiss Franc. The economic turmoil is expected to continue next week with the possibility of this pair trading well below the current support at 1.0130.
The USD/CAD suffered another weekly loss as surging commodity markets, led by Crude Oil, led traders to aggressively buy Canadian Dollars. Although there was some short covering near the close on Friday, expectations are for the break to continue into early next week. The only positive for this market is that some traders believe the weakening U.S. economy and stock market will spillover to the Canadian markets. This would neutralize the pair near 1.00.
The AUD/USD continued its trek to a new all time high with a strong rally on Friday. This pair finished up for the week and in a position to challenge the two main tops at .9648 and .9655. With the U.S. economy weakening and the financial markets seemingly on the brink of a collapse, look for speculators to continue to flock to the Aussie. Some traders are saying that the buying at current levels is strong enough to drive this pair to 1.00 within a few months. The interest rate differential is still favoring the long side of the Aussie versus the Dollar. With U.S. rates left unchanged, and the future of a rate hike unclear, traders are putting their money to work at the highest level possible.
Traders are taking advantage of the higher yields and parking their money in the NZD/USD despite indications of a recession in New Zealand. Many Kiwi traders feel the FOMC's statement was not aggressive enough and are taking longer-term positions against it. Fundamentally, the New Zealand economy is contracting, but that news has not been enough to chase away investors. The only way to stop the rally is for the Fed to raise rates or the Reserve Bank of New Zealand to lower rates. Look for the trend to turn up on a trade through .7646.
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