Sovereign Debt Woes Boost Demand for U.S. Dollar

The Dollar is trading higher versus all major currencies except the Yen. Investor concerns about the sovereign debt woes in Greece will simply not go away. Traders are taking protection overnight in the Dollar and the Japanese Yen.

The Dollar is trading higher versus all major currencies except the Yen. Investor concerns about the sovereign debt woes in Greece will simply not go away. Traders are taking protection overnight in the Dollar and the Japanese Yen.

The EUR USD is heading lower, pressured by concerns that despite the proposal of a new budget plan, Greece lacks the means to deal with its deficit issues on its own. Fears are also being raised that the fiscal problems in Greece are not isolated and may spread throughout the Euro Region should it default on its debt.

This morning the European Central Bank will make its monetary policy announcement. The consensus says that interest rates will remain at the historically low 1% level. The focus will be on ECB President Trichet’s press conference. Although he will discuss the Euro Zone economic situation as usual, he will most likely be peppered with questions regarding the growing concerns about Greece. Traders are anticipating that he will warn other countries about getting their budgets in order. In addition, he will address the possibility that the ECB or the European Union will come to the rescue of Greece. This is unlikely, however, because they both lack the authority to enact such a move. It may take action from the International Monetary Fund to avoid a catastrophic collapse.

Adding further to the Euro’s woes was the news that German Factory Orders plunged 2.3%. This report coupled with the recent string of good U.S. economic reports signals that the global recovery may be uneven with the U.S. surging while Europe remains stagnate. Despite the European economic problems, the main issues facing the Euro remain the Greece situation and debt relief.

The Bank of England is expected to announce this morning that interest rates will remain at a historically low level. The key to the direction of the GBP USD will be whether BoE members vote to continue purchasing assets in an effort to support the economy. The poor showing in the last quarterly GDP report and softening money supply growth are two reasons why the BoE may decide to expand or extend its quantitative easing program. The recent performance in the economy shows that the U.K. stimulus programs have been a failure. Some may argue that expanding the program will be inflationary as evidenced by the most recent spike in U.K. consumer inflation. This could cause a split vote amongst BoE officials.

The USD JPY is under pressure this morning as investors seek safety in lower yielding assets over concerns about the possibility of sovereign debt default. The Japanese Yen tends to strengthen during economic turmoil and uncertainty. Look for this pair to be the risk sentiment indicator today. As long as the fear of default exists, the Yen should continue to appreciate. At this time, the Bank of Japan has no plans to halt the rise in its currency. This could help fuel a steep decline in the USD JPY over the near-term.

The stronger Dollar is pressuring demand for commodities, namely gold and crude oil. This is helping to pressure the Canadian Dollar. Upside momentum is building which could send the USD CAD back to the last main top at 1.0720 rather quickly.

The weakening Euro has once again raised fears the Swiss National Bank may intervene to prevent the Swiss Franc from appreciating too much versus the Euro. This is helping the USD CHF mount a strong rally this morning. The USD CHF is in a position to test last week’s high at 1.0642. This is where this pair stopped last week following an intervention by the SNB.

The AUD USD is trading sharply lower overnight. This action has triggered a new low for the week. News that Australian Retail Sales dropped 0.7% in December fueled most of last night’s break. Additional pressure is coming from a fall in demand for higher yielding assets. Concerns over risk will be the catalyst that may drive this market down to the December low at .8734.

The NZD USD plunged to its lowest level since September overnight following the news that the New Zealand unemployment rate surged to its highest level since 1999. The move from 6.5% to 7.3% confirms the Reserve Bank of New Zealand’s concerns about a weak economy. Today’s bearish news may force the RBNZ to change its forecast for a rate hike from the middle of the year to later.

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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