Increased Demand for Risk Pressures Dollar

The U.S. Dollar lost ground against most of its counter-parts as better than expected U.S. economic data sent money into higher risk assets while paring the safety premium built into the Dollar last week.

The U.S. Dollar lost ground against most of its counter-parts as better than expected U.S. economic data sent money into higher risk assets while paring the safety premium built into the Dollar last week.

The Dollar was under pressure from the get-go this morning following a round of position squaring overnight in the European and Asian markets. Many traders were lightening up on overbought positions in the Dollar in anticipation of a choppy two-sided trade ahead of this Friday’s U.S. Non-Farm Payrolls Report.

This morning the Dollar got a little boost following the release of two better than expected economic reports, but was unable to build on the small gains. The reports showed a rise in consumer spending in December and an increase in U.S. manufacturing data last month. Although the Dollar was down today, there will be a point in the near future where the Greenback begins to benefit from the improving U.S. economy.

The EUR USD trading better throughout the U.S. session after firm overnight trading. Relaxed concerns about the fiscal crisis in Greece triggered today’s short-covering rally. Investors expect to hear more upbeat news on Wednesday when the European Union releases its official opinion on Greece’s efforts to shore up its budget. Upside momentum could take this market back to the last main bottom at 1.4029. Key support remains 1.3800. This price represents a major 50% retracement level.

Concerns over a poor economy, growing fiscal deficit and the upcoming U.K. election helped to pressure the GBP USD. Traders also remain pessimistic about how the economy will respond following the ending of the Bank of England’s quantitative easing program. Today’s trade indicates that bearish traders respected the late December main bottom at 1.5832.

The USD JPY traded higher following reports which showed improvement in the U.S. economy. Traders took the risk premium off the table and returned to looking at the improving economic data as the main reason to own the U.S. Dollar versus the Japanese Yen. The chart indicates that upside momentum could trigger a rally back to 91.45 over the near-term.

The USD CHF finished lower. Better than expected U.S. economic reports helped trigger an intra-day short covering rally, but this didn’t amount to much. Monday’s trading action shows that conditions have calmed after last Friday’s surge to the upside. The weaker Euro versus the Swiss Franc late last week may have triggered an intervention by the Swiss National Bank. Traders should continue to monitor the situation in Greece to see if it triggers another sharp break in the Euro. Look for renewed pressure on the USD CHF if the Euro continues to strengthen. Based on current conditions, the USD CHF may break back to 1.0495 before finding support.

Firmer equities, gold, and crude oil helped the USD CAD form a closing price reversal top. The USD CAD rallied last night, but buyers stopped short near the December top at 1.0745. Demand for higher risk and overbought conditions on Monday helped trigger the profit-taking break. The chart indicates this market is vulnerable to the downside with 1.0472 the next likely target.

The AUD USD finished higher after earlier weakness. This market also posted a daily closing price reversal bottom. This pattern could help trigger a short-covering rally to .9058 over the near-term. Stronger demand for higher risk assets, short-covering and oversold conditions also contributed to the rally.

On February 2nd the Reserve Bank of Australia will make its monetary policy announcement. There doesn’t appear to be a strong consensus at this time whether it will raise interest rates. Some traders feel that the news that China is tightening its monetary policy may have a negative effect on the Australian economy. This is leading to speculation the RBA will pass on a rate hike. A 25 basis point hike could be the catalyst behind a rally.

Demand for higher risk assets and oversold conditions helped to trigger a short-covering rally in the NZD USD on Monday. The charts indicate that upside momentum is building which could trigger a short-covering rally back to .7218. Watch for the New Zealand Dollar to feed off any strong move in the Aussie Dollar.