G-7 Fails to Assure Investors about Euro Zone Risks

The U.S. Dollar had a volatile trade overnight with a slight bias to the downside. Profit-taking was highlighted last night as traders turned a little positive that a solution was going to be reached regarding the escalating deficit issue in Greece.

The U.S. Dollar had a volatile trade overnight with a slight bias to the downside. Profit-taking was highlighted last night as traders turned a little positive that a solution was going to be reached regarding the escalating deficit issue in Greece. Overbought technical factors even helped to weaken the Dollar. Rumors swirled overnight that a solution had been reached to shore up Greece’s finances. These most likely began following a positive comment by French Finance Minister Christine Lagarde’s comment at the Group of Seven meeting. She stated that Greece’s budget deficit would be “managed”.

Following a short-term rally in the Euro and a subsequent break in the Dollar, the Greenback began to strengthen late in the session, as traders began to weigh the evidence for and against a Greece resolution. The Dollar began strengthening after investors realized that there were still some concerns about the fiscal health of some Euro Zone nations and that the G-7 did not offer up strong enough reasons to believe that the situation would improve.

Although European ministers tried to assure their U.S. and Asian counter-parts that they would ensure that Greece would stick to its proposed budget, investors reacted as if their statements failed to instill the confidence needed to prevent a derailing of the global economic recovery.

The EUR USD saw a choppy two-sided trade overnight. Early session rumors of a solution to the deficit issues in the Euro Zone helped support the Euro, but those gains were erased by worried traders. Continue to look for a volatile trade with a bias to the downside until the European Central Bank, European Union or International Monetary Fund offers a viable solution to the Euro Region’s fiscal problems.

Pressure is on the GBP USD overnight. Besides the weak economy, investors are now having to deal with the possibility that the U.K. will suffer the same fate as Portugal, Spain and Greece and have its debt rating reduced because of its huge budget deficit. Furthermore, news that the June election could result in neither party receiving a majority is also hurting the British Pound.

The USD JPY is trading a little better, but this situation could shift quickly if risk aversion returns to the markets. Budget problems in Europe, the U.K. and the United States may encourage traders to seek the safety of the lower yielding Asian currencies. An overnight recovery in U.S. equity markets helped the Dollar trade higher versus the Yen, but this gain disappeared after the stock markets turned negative.

The direction of the USD CHF will be determined by the movement in the Euro. A weaker Euro will increase the chances of a Swiss Bank intervention, thereby strengthening the Dollar versus the Swiss Franc. A short-covering rally in the Euro will pressure the USD CHF.

Strong gold and crude oil are helping to pressure the USD CAD. Look for the Canadian Dollar to strengthen as long as it is getting support from the commodity complex. The weaker stock market will help to limit these gains.

The AUD USD and NZD USD are poised to rally following Friday’s closing price reversal bottom. Early in the trading session, the Aussie and Kiwi posted strong gains as both higher commodity and equity markets were driving up demand for higher yielding assets. These two markets erased their earlier gains once the U.S. stock markets turned negative. Look for a choppy, two-sided trade as long as their remains uncertainty about investor aversion to risk. If equity markets stabilize then rally, watch for the NZD USD and AUD USD to turn positive.

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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