U.S. Dollar Rises after China Tightens Interest Rates

The U.S. Dollar erased early overnight losses and is now trading higher after China shocked the Forex markets with a surprise hike in interest rates.

The U.S. Dollar erased early overnight losses and is now trading higher after China shocked the Forex markets with a surprise hike in interest rates. China’s move to curb excessive lending and curtail price increases drove traders into lower yielding, safe haven currencies. China’s central bank sold 3-month bills at a higher interest rate for the first time in 19 weeks.

The AUD USD is trading lower before the New York opening. Early in the trading session, the Aussie surged to the upside after a strong retail sales report heated up speculation that the Reserve Bank of Australia would hike interest rates once again at its next meeting on February 2nd.

The news of China’s rate hike triggered a profit-taking sell-off as traders read this action as a sign that demand would slow for raw materials from Australia. A drop in demand for commodities would hurt exports and the economy. Technically, the Aussie Dollar is in a position to post a daily closing price reversal top which could lead to a correction to .8999 – .8937.

The NZD USD rose in conjunction with the good news from Australia, but weakened after China hiked interest rates. Like the Australian economy, the New Zealand economy relies heavily on exports to China. The move by the Chinese government signals that demand for New Zealand goods may be curtailed. Technically, a closing price reversal top is forming which could lead to a correction back to .7198 – .7145 over the near term.

Support continues to erode for the GBP USD as this market remains top heavy. Overnight selling pressure took out weak longs who were trying to establish support at a retracement zone at 1.6036 to 1.5988. If selling pressure continues, the most obvious downside objective is the recent bottom at 1.5832.

This morning, the Bank of England is expected to leave interest rates at 0.50% while leaving its asset purchase program intact. The surprise would be a change in its quantitative easing program.

Trumping the BoE meeting is the heated debate over the budget deficit. Prime Minister Gordon Brown and Conservative opposition leader David Cameron are currently engaged in a heated discussion on how to handle the growing budget difficulties.

The EUR USD weakened overnight as demand for higher risk assets dropped following the rate hike in China. At this time, the Euro is stuck in a range between 1.4217 and 1.4483. Prices are currently hugging the retracement zone of this range at 1.4350 to 1.4319.

Bearish comments from the new Japanese Finance Minister helped trigger a surge in the USD JPY. Overnight Naoto Kan said he wanted to see a weaker Yen. This announcement is leading traders to believe Japan may be more inclined to stem any sharp rise in its currency. Kan feels that his job will be to keep the Yen at an “appropriate level”. His job will be to keep up interest in Japanese exports.

Technically, the USD JPY should remain strong as long as the uptrending Gann angle at 91.58 remains intact. Based on the main range of 101.44 to 84.83, traders should look for a retracement to 93.13 to 95.09 over the near term.

The stronger Dollar is helping to pressure the Swiss Franc. Current price action suggests the formation of a daily closing price reversal in the USD CHF. Based on the short-term range of 1.0507 to 1.0242, traders should look for a minimum retracement to 1.0374 – 1.0406.

The USD CAD is picking up strength ahead of the U.S. opening. The current chart set-up suggests a possible closing price reversal bottom at 1.0290. The first upside objective is 1.0459. Weaker gold and crude oil prices could trigger an acceleration to the upside.