Foreign Currencies Rally Fueled by Strong Appetite for Risk

The U.S. Dollar traded weaker on Tuesday in a continuation of the rally that started Sunday night. Stronger equity markets helped fuel a greater desire for higher risk assets.

The U.S. Dollar traded weaker on Tuesday in a continuation of the rally that started Sunday night. Stronger equity markets helped fuel a greater desire for higher risk assets. The G-20’s pledge to continue to provide financial stimulus to the global economy was a huge factor contributing to the rally. The thought of pumping more money into the global economy triggered renewed demand for equities and commodities with industrial metals leading the way. Traders also reacted favorably to renewed questions about the role of the Dollar as the world’s number one reserve currency.

The EUR USD surged to the upside while making a new high for the year. German economic reports this morning offset each other, leading to the belief that this rally is being fueled by a desire for higher yielding assets. This morning’s reports showed a rise in German exports but weakness in German industrial production. The Euro is now in a position to test a major 50% area near 1.4700.

An unexpected rise in British industrial production along with greater demand for higher yielding assets helped support the rally in the GBP USD. Today’s upside action helped this currency pair test 50% of the August break. One reason for today’s rally could be position squaring ahead of this week’s Bank of England meeting. In light of the recent improvements in the economy, short traders are nervous about whether the BoE will make adjustments to its quantitative easing program. In early August the BoE triggered the start of the recent break by announcing the expansion of its asset buyback program.

The USD JPY traded under pressure throughout the day. The desire to hold Japanese Bonds over U.S. Bonds helped fuel demand for the Yen. The carry trade does not seem to be a factor today even though U.S. equity markets are trading higher.

Stronger energy prices coupled with firm U.S. equity prices helped trigger demand for the Canadian Dollar. The strong rally in industrial metals also contributed to the rally. Traders have to be leery of potential Bank of Canada action if the Canadian Dollar makes a new high for the year. The BoC is already on record saying a strong rise in the Canadian Dollar is likely to curb demand for Canadian goods and services.

Demand for higher yielding assets helped drive the NZD USD and AUD USD higher. Australian Dollar traders are also positioning themselves for a rate hike by the Reserve Bank of Australia in the near future. The rapid rise in both of these currencies may raise concerns among their central banks as both could threaten their respective export markets.

James A. Hyerczyk has been actively involved in the futures markets since 1982. He has worked in various capacities within the futures industry from technical analyst to commodity trading advisor. Using W. D. Gann Theory as his core methodology, Mr. Hyerczyk incorporates combinations of pattern, price and time to develop his daily, weekly and monthly analysis. His firm, J.A.H. Research and Trading publishes The Forex Pattern Price Time Report... More

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