The AUD was strong against the U.S. Dollar as traders anticipated another interest rate hike. The RBA is expected to raise rates by Â¼% to 7% on Tuesday, Feb. 5 (2:30EST). Australian rates are nearly the highest among the major currencies. While key central banks have been aggressively cutting rates, the RBA has been steadily raising rates. This action has boosted the Australian currency against the U.S. attracting both hedge fund and speculative traders. Late Monday talk circulated of a possible 50 basis point increase. This kind of chatter reminds us that America's economic problems have not stopped the growth in other parts of the world. Watch the tone of the commentary as some economists feel that this could be last of the hikes.
Later in the week on Thursday, Feb. 7, the Bank of England (BoE) and the European Central Bank (ECB) are both set to make interest rate announcements. The BoE is expected to cut rates by Â¼% to 5.25%. Slowing in retail and manufacturing sectors are prompting this anticipated cut although talk circulated that BoE may decline to soften rates over impending inflation concerns. The ECB is expected to hold rates steady even in the face of softening growth. The market is expecting growth rates to diminish throughout the year as the U.S. economy teeters on the brink of a recession.
The inability of the EUR to make new highs against the U.S. Dollar could be a sign that traders are going to allow monetary policy to work the U.S. economy out of its troubles. The recent aggressive rates cuts by the FED have placed U.S. Dollar bears on the sidelines as traders take a look and see attitude toward the economy. The action by the FED is a definite sign that they are more focused on the economy rather than the Dollar. However, the Dollar has not been sold with much vigor as it was in the fall when the credit situation and economic uncertainty weighed heavily on the U.S. economy. Aggressive players will watch more cautiously later in the month, as the more important economic reports are unveiled. Any sign of weakness or failure of monetary policy is likely to trigger the start of another leg higher in the EUR.
Aggressive USDJPY and USDCHF traders took on risk early in the session coming off firm Asian stock markets. Traders in these two pairs flipped to the short side as the U.S. stock market could not hold overnight gains. Intraday chatter surfaced regarding a possible rate cut by the BOJ to stem recent buying in the JPY.
Early in New York, economic data showed the lowest level of orders placed with American factories since 2002. Although December orders rose 2.3%, total orders placed in 2007 with U.S. factories rose by just 1.4%. This was the indicatorâ€™s worst performance since 2002.
This weekâ€™s U.S. reports include January ISM Services (2/5, 10:00 EST), Fourth Quarter Preliminary Productivity (2/6, 8:30 EST), December Pending Home Sales (2/7, 10:00 EST), December Consumer Credit (2/7, 15:00 EST) and December Wholesale Inventories (2/8, 10:00 EST). .
EUR/USD â€“ The EURUSD did not confirm the daily reversal down with a follow through break today. This is an indication that players would rather sell against some high or retracement rather than on weakness. This is typical action in a long- term bull market as counter-trend traders do not appear to be very aggressive. Follow through selling is still needed to confirm the reversal top. A move through 1.478 would confirm the short term top and could trigger a minimum 50% correction of the 1.436 â€“ 1.495 range to 1.465. Expectations are for fresh buyers to step in on the test of 1.465. If 1.479 holds as the near term low, then watch for a rally back to 1.487. Counter trend traders could become aggressive sellers at this price. With the reversal top still in tact, the markets look bearish over the short term. Once again, aggressive selling with conviction through 1.478 is needed.
USD/JPY â€“ This pair remains in a tight range as traders assess the near term resistance at 107.88. As mentioned several times over the past few days, this market is poised for a large volatility move, as traders have kept it inside of a tight range. The key to any expansion of the range is whether traders can take out 107.88. A move through this price turns the trend to up and is likely to trigger some strong short covering. Bullish traders regained a major retracement area at 106.42 â€“ 106.08. This area must attract new buyers on all re-tests to give the pattern time to develop. The developing bullish pattern fails, however, if 105.70 is penetrated. The action in two out of the last three days shows the importance of this support.
GBP/USD â€“ The trend remains up as the market tested a major retracement area at 1.964. The strong buying that came in triggered a rally to short-term resistance at 1.979. This completed a 50% retracement of last week's sharp break. 1.979 controls the short-term direction of the market. Regaining this price and establishing support at or above it, puts the market back on its path toward a major retracement price zone at 2.024 â€“ 2.046. The bulls know the importance of 1.964. Based on the previous week's daily/weekly reversal bottom, a strong up move is developing provided Mondayâ€™s low holds. Watch for aggressive buying over 1.979 to trigger aggressive short covering. The best selling opportunity over the near term will be 2.024 â€“ 2.046. Bears should remain patient at current levels waiting for the retracement or unless 1.964 fails on a retest.
USD/CHF â€“ The USDCHF had a slight follow through rally following Friday's daily closing price reversal bottom. It did not go through this price with the expected conviction. This weak action indicates that the market is poised to retrace at least 50% of this first leg up. The current short-term range is 1.072 â€“ 1.092. The expected retracement should break the market back to 1.082. A test of this price is necessary as the market is trying to build a supportive base. The USDCHF has been one of the weakest pairs having posted new recent lows as of Friday. Despite the large short-covering rally, the market did not change trend. Although only a daily reversal bottom, the current daily chart set-up indicates the potential for a rally to 1.116 if buyers step in at 1.082. Despite the strength of the rally on Friday, this market still has to build a base to support the start of a change in trend. Long term traders should wait to sell 1.116 if possible. Counter-trend traders should look for a 50% pullback of this first up leg to hold. If new buyers come in on this retracement, then look for higher markets to follow.
USD/CAD â€“ Monday's action supported last week's conclusion that the long-term downtrend appears to be ready to resume. As long as the market stays under 1.008, expectations are for more selling to push it to .9716. Buyers may surface at this price to trigger another short-covering rally. Shorts have to arrive with conviction next week on selling through .9872 otherwise the market may begin a sideways drift. A close over .9960 may put the market back in a somewhat friendly tone and a trade through 1.008 indicates 1.017 is next.
NZD/USD â€“ The anticipated strong breakout rally above .7936 fizzled as traders failed to support the move with conviction. The close back under the old high gives a mixed signal as now the daily chart looks as if the market has posted a short term top. Follow through selling through .7898 confirms the short-term top at .7966. This could indicate a further break to .7680 over the near term. Regaining .7936 on a closing basis or breaking .7966 on an intra day basis will put the market back on target for a test of .8107.
AUD/USD â€“ The strong follow through rally from the .8511 bottom on 1/22/08 continued on Monday. The key is to continue to hold the old top at .9017. The market regained an important .618 level at .9063. This price is now new support. As long as support holds, look for .9399. A rate hike is expected this week that could cause a spike higher. Be cautious adding new longs at current levels as the market could turn into a buy the rumor, sell the fact scenario.
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