Investors Using U.S. Dollar for Funding Riskier Assets

The U.S. Dollar finished lower against most major currencies on Friday as investors continued the trend of funding riskier assets with the lower yielding Dollar

The U.S. Dollar finished lower against most major currencies on Friday as investors continued the trend of funding riskier assets with the lower yielding Dollar. The Dollar also took a hit following the release of a better than expected University of Michigan Confidence Survey. News that China’s industrial output rose 12.3% was also a catalyst contributing to the Dollar’s weakness.

The EUR USD finished slightly lower on Friday but up close to 2% for the week. Today’s sell-off was technically based as this currency pair hit a key retracement level at 1.4622, encouraging long traders to take profits. Appetite for higher yielding assets was the primary reason behind the strong surge in the Euro this week.

The GBP USD continued its strong up move today as this market is basically playing “catch up” following last month’s huge sell-off. Yesterday’s news that the Bank of England would leave bank deposit rates unchanged helped fuel today’s rally. Despite the current rally, the Pound should continue to lag the rest of the major currencies until the U.K. economy turns a corner or the BoE reduces government stimulus.

The USD JPY finished the week on a multi-month low as traders continued to use the Dollar as a funding currency rather than the traditional Yen. The current downtrend could accelerate to the downside now that the important 91.00 support area has been breached. Unless there is a dramatic turnaround to the downside in global equity markets, continue to expect pressure on the USD JPY.

Stronger demand for higher yielding assets helped support the Canadian Dollar today but gains were limited by the weakness in crude oil. Selling pressure has been on the USD CAD for several days but this currency pair has not accelerated to the downside. Traders are concerned that the Bank of Canada may take action to quell the Canadian Dollar’s rapid rise because of its negative effect on the economy.

The AUD USD finished the week at its high for the year, but closed lower for the day. Increased appetite for risk helped boost the Aussie but gains were limited by the news this week that retail sales were down as well as exports. Both of these events encouraged traders to lighten up positions since the Reserve Bank of Australia was not likely to raise rates until December. Traders had been buying the Aussie in anticipation of a rate hike in October.

The NZD USD finished higher for the day and the week buoyed by stronger appetite for risky assets and perceptions that the New Zealand economy was poised for a recovery. Earlier in the week, the Reserve Bank of New Zealand left interest rates unchanged and hinted that additional rate cuts were possible. This threat apparently did not rattle investors who continued to push prices higher.

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