Weaker U.S. Dollar Drives Commodity Currencies Higher

By: Brewer Futures Group | Tue, May 5, 2009
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The U.S. Dollar started the day stronger but early U.S. housing and construction spending reports came out better than expected and triggered a reversal in the Dollar. Gains were limited in the GBP USD because of thin holiday driven trading. The Euro was also met with some intraday selling pressure ahead of this week's European Central Bank meeting. Commodity currencies such as the Australian Dollar, New Zealand Dollar and Canadian Dollar all posted strong gains because the weaker U.S. Dollar and a global economic recovery are expected to ignite demand for commodity exports.

Trading could become choppy as we approach the end of the week because of the U.S. Non-Farm Payrolls Report on Friday. Based on how much the equity markets have recovered because of better than estimated economic news, this could be called the biggest report of the year.

The Euro finished the day higher after opening lower. A better than expected U.S. housing report erased earlier weakness caused by a worse than expected German Retail Sales Report. Gains may be limited to the upside as traders await this week's decision from the European Central Bank.

Over the weekend the European Commission cut its forecast for the Euro Zone. The new report now shows a contraction twice as deep as it estimated close to 90 days ago.

In addition to a contraction of about 4%, the budget deficit for this region is expected to widen to 6.5% while unemployment may soar to 11.5%. The news that German Retail Sales fell unexpectedly in March encouraged selling pressure early Monday morning.

All of these reports indicate that an interest rate cut by the European Central Bank to a historically low 1.0% is inevitable. The market moving news will be the announcement of the ECB's quantitative easing plan. Traders are interested in seeing how big the plan is and what it encompasses. The Euro could be under pressure if this new plan is bigger than estimated.

With markets closed in Great Britain, trading was light and choppy, but this didn't stop the British Pound from mounting a small gain. Pressure was on this market early but a better than expected U.S. housing report turned the market around.

Traders are now looking at this report as another sign of an impending recovery in the U.S. economy and another reason to increase demand for more risky assets.

Gains were tempered today because of the thin trading conditions and also because of the lingering contraction in the U.K. economy and its widening budget deficit.

Growing confidence that the U.S. economy is bottoming helped to support the Canadian Dollar. Overnight pressure was completely reversed this morning following a better than expected U.S. housing report.

The strong surge in the equity markets helped to support the Canadian Dollar. Recent action in this market indicates a strong link to the stock market. Gains in key commodity markets such as precious metals and crude oil also were supportive.

It looks as if the Bank of Canada made the right decision in deciding not to apply quantitative easing to the economy. The Canadian Dollar has surged since it decided to take a wait and see attitude on this powerful monetary tool.

The Japanese Yen started the day lower but quickly rallied to the positive side following a U.S. housing report that showed the U.S. economy may be recovering.

The rally in the Yen was a surprise as strong equity markets usually trigger renewed interest in the carry trade. This occurs when traders borrow the lower yielding currency to invest in higher yielding assets.

Technically this market is being draw into retracement zone at .98.53 to 99.22. This area represents a major decision point for most traders. A close over 99.22 could set up the market for a rally through the last swing top at 101.44. This action would make 95.68 the new higher bottom.

If the market starts to build a lower top at 99.22 then look for it to begin to rollover to the downside with the swing bottom at 93.53 the first target.

Watch the order flow at 98.53 to 99.22 for clues as to how to play the current trading conditions.

The Swiss Franc was driven higher on Monday on the news that the U.S. economy may be improving. This morning's better than expected U.S. housing report was interpreted as a strong sign that the housing market has reached bottom.

Remember the housing market topped before the economy went bad so many analysts believe that in order to turn around the economy the recovery must be led by a housing market bottom.

Speculators drove the AUD USD higher today. Traders were optimistic about a recovery in the Australian economy because of the overnight news that Chinese manufacturing increased for the first time in nine months. News of a recovery in China's economy could lead to increased demand for Australian exports.

Investors also bought the Aussie because of demand for higher-yielding assets. This increased demand was triggered by trader optimism that the global recession may be easing. Traders are now looking for return on their capital rather than just return of their capital.

The recent strength in the global economy may open the window for the Reserve Bank of Australia to leave its benchmark interest rate unchanged at 3.0% tomorrow. The financial markets are indicating that there is a 24% chance of a 25 basis point reduction. Any cut will be bearish for the Australian Dollar but a cut of greater than 24% could trigger a sharp break.

Despite the fact that the weekly swing chart is indicating a change in trend to up by the move through .7267, this pair is not expected to sail through to the target zone at .7928 to .8382 without some kind of a pullback. Economic reports are still indicating weakness in the Aussie housing market and an increase in unemployment.

Traders drove up the NZD USD on speculation of new demand from China for New Zealand exports. Although China's manufacturing sector posted a gain for the first time in nine months, it is going to take a lot more than a bullish economic report from another country to get the New Zealand economy rolling.

Just last week the Reserve Bank of New Zealand hinted at more rate cuts and an economic decline until mid-2010. This doesn't sound like bullish news to me. News that the first quarter GDP contracted and that the budget deficit is widening could put renewed pressure on this currency pair later this week.

The NZD USD may go up on greater demand for higher-yielding assets but the reality is that this economy is not strong enough to justify a rally. The daily swing chart is still down and is not expected to turn up until .5932 is violated. The bigger picture indicates that this market needs to correct to at least .5435 to .5307 before starting another leg up.

 


 

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