Dollar Rallies as Demand for Higher Risk May Have Been Overdone

The U.S. Dollar is expected to open higher across the board following a sharp rally overnight against all major currencies. The rally in the Dollar started in Asia following a sell-off in the Japanese and Chinese stock markets.

The U.S. Dollar is expected to open higher across the board following a sharp rally overnight against all major currencies. The rally in the Dollar started in Asia following a sell-off in the Japanese and Chinese stock markets. The overnight action suggests that last week’s rally triggered by demand for higher risk assets may have been overdone.

Some analysts attribute the break to the return of traders from summer vacation while others attribute the weakness to the possible “economic war” brewing between the U.S. and China.

Although the traditional end of summer vacation is Labor Day, last week featured light volume which was an indication that many traders were still on the sidelines. Last week’s huge sell-off in the Dollar was discounted by some who felt the light volume indicated the absence of a major seller. Dollar bears basically had their way with the Dollar. Last night’s action indicates that last week’s action may have been overblown and that the Dollar may rally back to a more acceptable valuation.

Traders cite the confusion over the strength of the global economic recovery as a reason to buy the Dollar. Some feel that there is not enough evidence of a strong recovery in the world to be too pessimistic on the Dollar. Furthermore, excessive speculative demand for higher risk assets may be completely unwarranted until more solid evidence of a global recovery is presented in economic reports.

Another factor contributing to the weakness in global equity markets and the subsequent rally in the Dollar is the possible “economic war” between China and the U.S. Last week, President Obama surprised Chinese officials by raising taxes on the import of Chinese manufactured auto tires. China reacted by calling this move protectionism. This reaction has made traders nervous about holding higher risk assets on the thought that China would implement economic sanctions of its own to combat the move by the U.S. An aggressive move by the Chinese at this time could curtail economic gains in both countries that would slow down the recovery process.

The GBP USD is getting hit hard overnight as many traders feel last week’s rally was overdone to the upside. The U.K. economy is still in bad shape and last week’s action by the Bank of England to leave rates unchanged did nothing to improve the economic picture.

Technically, the British Pound failed near a major retracement level at 1.6687. The current chart formation suggests a break back to 1.6426 to 1.6352 is likely.

The Euro also stopped at a key retracement zone at 1.4538. Diminished appetite for risky assets is leading to a sell-off this morning, but this market is in no danger of changing the trend to down unless the bottom at 1.4047 is violated. Look for the start of a minimum correction to 1.4340.

Weakness in U.S. equity markets and lower energy prices are contributing to the weakness in the Canadian Dollar this morning. Traders are also concerned that a rapid rise in the currency will damage the start of the recovery process in Canada.

The USD JPY is mounting a gain this morning. Lower demand for higher yielding assets and oversold technical conditions are contributing to the rally.

Higher yielding assets such as the New Zealand and Australian Dollars are feeling pressure overnight as demand is down for risky assets. Many traders feel that last week’s rally may have been too strong given the current global economic outlook.

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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