Investors Flee Higher Risk Assets for Safety of U.S. Dollar

For the fourth straight day, investors dumped higher risk assets for the safety of the U.S. Dollar. Today’s weakness reflects a change in sentiment toward lower yielding assets.

For the fourth straight day, investors dumped higher risk assets for the safety of the U.S. Dollar. Today’s weakness reflects a change in sentiment toward lower yielding assets. Many investors are beginning to realize that central banks are gearing up to end their stimulus programs and begin considering other ways to remove excess liquidity from their financial systems. As a result, investors are taking money off the table in the asset classes that benefitted the most from the weaker Dollar.

The EUR USD finished sharply lower. Based on the recent range of 1.4480 to 1.5063, the Euro has retraced .618 to 1.4696. A successful test of this area could result in the start of a short-covering rally, but traders have to watch the momentum before trying to pick a bottom. The daily closing price reversal top at 1.5063 has been confirmed and the objective reached. A weekly reversal in still possible if the Euro finishes lower for the week on Friday. Based on the current set-up, there may be vicious retracement to the upside as bearish traders try to set up a secondary lower top.

During the recent sell-off, traders piled on the GBP USD with almost every currency gaining on the Sterling. This is most likely the main reason why the British Pound was relatively stronger than the other currency markets today. For example, as the Euro weakened, traders were forced to unwind Euro/Pound spreads. This gave the British Pound strength. It isn’t that the British Pound is perceived as stronger than the Dollar; it’s just that the spreads have to be adjusted. Once this situation is rectified, the GBP USD should weaken as money leaves higher yielding assets. Fundamentally, the U.K. economy remains weak as evidenced by the recent report showing a contraction in the economy during the Third Quarter. This weakness is causing speculation that the Bank of England will expand and extend its asset purchase program.

The USD JPY lost substantial ground today as Japanese investors increased their repatriation of investment funds. Often at the end of the month, Japanese companies repatriate funds earned overseas. While this may be happening, additional support is begin provided by investors taking money out of higher yielding assets. The key area to watch is 90.15. This price represents a 50% retracement of the recent rally and could prove to be an important support price for the start of a short-covering rally.

Weaker equity and crude oil markets coupled with stern comments from the Bank of Canada are helping to trigger a huge surge in the USD CAD. The current rally has retraced more than the normal amount which could be indicating overbought conditions. This will not be know until the market stops going up and pulls back into the retracement zone at 1.0695 to 1.0602. If upside momentum continues then look for serious resistance to develop as the market approaches an old top at 1.0991.

The USD CHF rallied sharply higher today after an early hesitation at the 50% level at 1.0242. The close over this price indicates a test of 1.0292. Weakness could develop under 1.0242, but buyers are likely to come in at an uptrending Gann angle at 1.0192.

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