Technical Factors; Reduced Risk Aversion Pressure U.S. Dollar

Overbought market conditions and reduced demand for safe-haven assets helped to weaken the U.S. Dollar overnight.

Overbought market conditions and reduced demand for safe-haven assets helped to weaken the U.S. Dollar overnight. Technically, both the Relative Strength Index and the Stochastic Oscillator have placed the Dollar into overbought territory. Reduced concerns about sovereign debt issues in Greece, Spain and Portugal have helped increase demand for higher risk assets. The combination of these two factors could pressure the Dollar today.

The Dollar reached a three-month high this week, driven by a flight to safety rally spurred by a downgrade in Greece’s debt and position adjustments because of changes in Fed policy regarding the possibility of a shift toward a tighter monetary policy. There have also been signs the Dollar is beginning to react positively to good economic news.

The EUR USD is trading slightly better. Oversold conditions may have stopped the decline, but the news that business confidence rose to a 17-month high in December is most likely the catalyst behind the overnight strength.

Increased risk appetite is contributing to the strength in the GBP USD. Overnight, the Bank of England Financial Stability Report said the U.K. financial system is “significantly more stable”. It did add, however, that the “probability of default by U.K. real estate companies has increased significantly”. The British Pound could see volatile trading over the next couple of months as the Bank of England begins to phase out of its quantitative easing program. The possibility that U.K. households will continue to face weakening labor conditions as well as tightening credit conditions could fuel further weakness. Finally, the threat of a cut in the U.K. debt rating from AAA remains a concern among long-term investors.

Last night the Bank of Japan left its benchmark interest rate at 0.10%. In addition, it hinted that its biggest concern remains deflation. Overall there were no surprises in the policy statement. Reduced demand for safe haven investments is giving the USD JPY a boost this morning.

Stronger crude oil, equities and gold are helping the Canadian Dollar recover some of this week’s losses. Although USD CAD traders showed a firm commitment to the upside yesterday, no significant trend changes took place and the market has fallen back inside of its 60 day range.

Overbought conditions are pressuring the USD CHF. Yesterday’s spike to the upside may have been too much to handle. Traders sold the Swiss Franc yesterday on concerns the sovereign debt issues in Europe would adversely affect the Swiss Banking system. Now that debt concerns have eased, traders are using this lull in the market to take profits after yesterday’s surge.

The AUD USD is bouncing back after two days of selling pressure. Traders have been pressuring the Aussie this week because of the strong possibility the U.S. will begin raising interest rates. This event will trim the spread between Australian and U.S. rates since the Reserve Bank of Australia is likely to take a pause in its quest to raise rates, making the Aussie a less attractive investment. This currency pair could drop further if demand for higher yielding assets continues to erode.

A similar situation is facing the NZD USD. A reduction in demand for higher yielding assets is pressuring the Kiwi, but losses have been limited because of hawkish comments from the Reserve Bank of New Zealand earlier this month.

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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