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Wednesday, 19 Jan 2011

Interest Rate Differentials Trigger Dollar Selling

The US dollar sold off today in favor of higher yielding currencies with the largest gains seen in the euro and Aussie dollar. The Canadian dollar was sold following a dovish monetary policy statement.

EUR/USDGBP/USDUSD/JPYUSD/CHFAUD/USDEUR/GBP
Daily Trendupupdowndownupup
Weekly Trendupupdowndownupup
Resistance1.35501.610083.000.96601.01100.8490
1.35301.608082.800.96401.00900.8470
1.35001.605082.500.96101.00700.8440
Support1.34401.599081.900.95501.00100.8380
1.34101.596081.600.95200.99800.8350
1.33901.594081.400.95000.99600.8330

Economic News

USD - Dollar Down as Market Sentiment Shifts

Dollar weakness was prevalent today versus higher yielding currencies as market players shift out of the greenback. New Year asset allocations by big institutional investors are driving the recent declines for the dollar as larger players identify their investment strategies for the New Year which appears to be short on the dollar.

The release of the TICS Long Term Purchases showed foreigners were purchases of large quantities of American securities as investors return to US equity markets and bond markets that were shunned following the financial crisis. TICS rose to 85.1 Bn on expectations of only 43.4 Bn.

The Canadian dollar fell following a dovish monetary policy statement as the Bank of Canada held interest rates steady at 1.00%. Economists were looking for stronger rhetoric from the BOC and hopes of higher future interest rates.

At the end of the trading day, the EUR/USD finished higher at 1.3380 after opening at 1.3314. The USD/CAD traded higher at 0.9922 following an opening day price of 0.9858. The AUD/USD was stronger at 0.9970 from 0.9937. US equities were stronger which fed into the risk taking environment as the Dow Jones Industrials traded higher at 11,837.93, up 0.4%.

Traders today will be following the release of the US building permits as well as the BOC Monetary Policy Report which may see an upward revision to the Canadian economic outlook for 2011 and 2012. Support and resistance for the USD/CAD are found at the February 2010 low at 0.9710 and the October and November lows at 0.9980.

EUR - Euro Continues to Recover on Interest Rate Expectations

The euro was once again trading higher versus the majors as the EUR/USD reached its highest level against the dollar since mid-December. But the euro finished the day off its highs following a meeting of European finance ministers that failed to come up with any palpable steps to tackle the European debt crisis.

Talk of rising European interest rates has provided a boost to the euro as traders increase their expectations of a rate hike in Europe. Last week's hawkish comments by ECB President sparked talk of inflationary pressures in the EU and the euro has rallied ever since. This may help propel the euro higher given US policy makers are not expected to begin raising interest rates until early 2012.

At the end of the day, the euro was trading higher versus the dollar at 1.3380 from 1.3314. The EUR/CHF was up sharply at 1.2896 after opening the day at 1.2790. The EUR/GBP was higher at 0.8380 from 0.8353.

Euro strength may continue as interest rate differentials grow between the US and Europe. Current account numbers will be released from Europe today with economists forecasting a widening difference between exports and imports.

EUR/CHF support and resistance levels are found at the January 5th high at 1.2725 and last week's high of 1.2950.

JPY - Bullish Chart Pattern Hints at Future Appreciation for the USD/JPY

The yen was trading lower at the end of the day as traders shunned traditional safe haven assets such as the yen and the dollar in favor of higher yielding assets like the euro, Aussie dollar, and equities. A lack of data releases on the Japanese economic calendar left the yen susceptible to news events in Europe and the US which were yen negative.

The USD finished the day higher at 82.60 after opening the day at 82.49. The EUR/JPY was up sharply at 110.60 from 109.85.

A bullish flag pattern has taken shape on the daily chart of the USD/JPY, hinting at renewed buying of the pair. Following a rally during the first week of the year, price declines have volleyed between the declining channel lines. Estimates from the chart pattern hint at a price appreciation in the pair that targets the September high at 85.90.

Oil - Oil Unchanged Despite IEA Report

Spot crude oil prices were flat after a report from the International Energy Agency suggested more crude oil supplies will be needed from OPEC as global demand is forecasted to rise. The Paris based organization increased its monthly 2011 and 2012 estimates by 320,000 barrels a day. However, the report also warned that oil prices above $100 a barrel could stymie crude oil demand, triggered by an economic slowdown due to high energy costs.

At the end of the trading day spot crude oil was trading near its opening day price of $92.15. Prices reached as high 92.84, the highest price in over a year.

Further gains in crude oil may be booked as the price of spot crude oil has retraced 50% of its price declines from its 2008 to 2009. Traders may want to target the 61.8% Fibonacci level from the price drop which comes in at $103.75.

Technical News

EUR/USD

Momentum is shifting to the upside as the pair is testing the 1.3500 high of its consolidation pattern. A move above this level would set the stage for further gains in the pair. Resistance levels are found at 1.3785, 1.3970, followed by the November high at 1.4280.

GBP/USD

The pair has been one of the strongest performers since the New Year, moving above the trend line from the November high and is quickly approaching the 1.6090 level. The Cable's path higher is absent of major resistance levels until the November high and technical pressures may help push the pair higher.

USD/JPY

A bullish flag pattern has taken shape on the daily chart of the USD/JPY, hinting at renewed buying of the pair. Following a rally during the first week of the year, price declines have volleyed between the declining channel lines. Estimates from the chart pattern hint at a price appreciation in the pair that targets the September high at 85.90.

USD/CHF

Yesterday the pair tested but failed to close below the 0.9550 support level. Should the pair make a close below this support we may expect further declines in the pair in-line with the long term downward trend. Support for the pair comes in at 0.9500 followed by last year's low at 0.9300.

The Wild Card

Silver

Spot silver appears to have found support at the 28.00 level. This bounce higher may be an opportunity for forex traders to enter long on the commodity with a target at the previous rising trend line from late August that should serve as resistance which comes in today at $30.60

Current Time: 04/23 11:09 GMT
# Time $€£¥ Event Per. Prev. Fore. Act. Imp.
04/23
11:00GBP+ CBI Industrial Order Expectations67-13
13:30CAD+ NZD Core Retail Sales m/m1.0%0.6%-5
13:30CAD+ Retail Sales m/m1.3%0.5%-3
14:45USD+ Flash Manufacturing PMI55.556.2-3
15:00USD+ New Home Sales440K455K-5
15:30USD+ Crude Oil Inventories10.0M--3
22:00NZD+ Official Cash Rate2.75%3.00%-5
22:00NZD+ RBNZ Rate Statement***5
00:50JPY+ CSPIy/y0.7%0.8%-1
04/24
01:00EUR+ Spanish 10-y Bond Auction3.29|2.1*-1
07:00CHF+ Trade Balance2.62B2.79B-1
09:00EUR+ German Ifo Business Climate110.7110.5-5
10:00EUR+ ECB President Draghi Speaks***5
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