U.S. Dollar Reverses Early Trend to Close Higher

The Dollar opened lower this morning, driven to a 14-month low by demand for higher risk assets. Traders were buying equities and commodities while selling the Dollar on expectations of a strengthening global economy.

The Dollar opened lower this morning, driven to a 14-month low by demand for higher risk assets. Traders were buying equities and commodities while selling the Dollar on expectations of a strengthening global economy. Sentiment shifted however after the release of weaker than expected U.S. housing and Producer Prices. Both reports caught traders by surprise as many thought bullish earnings news from Apple, Inc. would set a bullish tone for the day. Instead, traders opted to let these two bearish reports set the tone for the day.

Traders fearing a weakening economy and the threat of deflation halted their demand for higher yielding assets and began seeking the shelter of the U.S. Dollar and Treasuries. The Dollar rose throughout the day as bottom pickers entered fresh positions and overbought currencies gave back recent gains.

The EUR USD opened higher as investors chose to ignore concerns voiced by Trichet and other Euro Zone Financial Ministers regarding the rapid rise in the Euro and its possible detrimental effects on Euro Zone exports. Traders drove the Euro higher until the buying stopped slightly below the psychological 1.50 barrier. Today’s action suggests that a combination of verbal intervention and high prices may lead to a break in this market to a more reasonable level.

The GBP USD closed lower today because of the turnaround in the U.S. Dollar. Sentiment has been driving this market higher since last week’s rumor that the Bank of England would put an end to its asset buyback program. This week started with rumors the BoE was actually considering expanding the program. So far this week trading can be described as sideways. The BoE is going to release its minutes later this week along with Third Quarter UK GDP. Both reports are expected to be market movers. Traders reading the minutes will be interested to see how the BoE members feel about expanding or ending the stimulus program.

The USD JPY started lower on Tuesday after Japanese Finance Minister Fujii said he would not intervene to stop the rise in the Yen until it was triggered by volatility rather than economic data. The strong rally overnight in the equity markets was also a contributing factor to the early strength. Once the bearish U.S. housing and PPI Reports were released, however, equities broke and demand for lower yielding assets helped push up the USD JPY.

The Bank of Canada voted today to leave interest rates unchanged along with its plan to begin raising rates sometime during the second quarter of 2010. This wasn’t the big news however. The subsequent statement by the BoC contained language which suggested the possibility of an intervention. Data showed that the recent rally in the Canadian Dollar had erased much of the gain the economy recently posted. This is raising concerns among central bank members that the economy will not be able to recover if the currency continues to strengthen. Traders read this statement as verbal intervention and covered short USD CAD positions, triggering a strong short-covering rally.

The minutes of the Reserve Bank of Australia monetary policy committee suggested that members were concerned that a rate hike might be pre-mature. In addition, the language suggested that current economic conditions do not dictate a 50 basis point hike in November. The AUD USD weakened on the news as traders had overbought this market in anticipation of an aggressive rate hike next month.

The NZD USD followed the Aussie lower as technical indicators show that this market may be overbought. Some traders feel that aggressive bets on a rate hike in November may have been a case of over-speculation since the Reserve Bank of New Zealand is offering no sign of changes in its plan to hike rates later next year.

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