Dollar Finishes Week in Strong Position; Focus Remains on EU/Greek Pact

The U.S. Dollar soared early Friday following a surprise 50 basis point hike in China’s bank reserve rate.

The U.S. Dollar soared early Friday following a surprise 50 basis point hike in China’s bank reserve rate. Additional strength was provided by a better than expected U.S. Retail Report. The Dollar pared some of its gains after the University of Michigan Survey fell unexpectedly. Forex market trading has been erratic ahead of the week long Chinese holiday and the extended U.S. weekend.

The aggressive move by China is an attempt to cool credit without tightening interest rates. The intention of China’s central bank is not to derail the economy but to preserve its expansion. The easy flow of stimulus money has created a potentially overvalued real estate and housing bubble in China. Friday’s action by China to raise bank reserves by 50 basis points on February 25th is the central bank’s attempt to avoid an asset bubble.

Also contributing to the strong rally in the Dollar was another round of aggressive Euro selling. Poor German and Euro Zone economic data as well as the lack of solid steps by the European Union to help Greece were the bearish forces driving this market lower.

Several days of tight trading ranges contributed to the severity of the overnight decline in the EUR USD as volatility returned in a big way once fresh 2010 lows were reached. Worse than expected German and Euro Zone GDP reports ignited the initial break with the news from China providing additional fuel to the sell-off. The reports that GDP did not continue its uptrend from the last two quarters sent a signal to the markets that the global recovery may be faltering or stalling. The poor GDP reports should provide more incentive to EU members to get the Greece situation straightened out more quickly.

While the news from China and the poor Euro Zone economic data are making the headlines, investors are still expressing their dissatisfaction with the proposal by the European Union to rescue Greece from an economic disaster. Although the EU is ready to assist Greece if needed, support for the plan remains uncertain. This suggests that additional measures may be necessary. This translates into outside money may be required. Talk is swirling that the International Monetary Fund stands ready to come in if necessary.

Bearish traders are sitting on a record amount of short positions against the Euro. These traders feel that the current plan will fall short in helping Greece tackle its fiscal deficit. EU nations are throwing their support behind the plan as a show of solidarity rather than posting real money. The European Central Bank threw its support behind the pact in an effort to boost solidarity by saying the ECB will work with the EU. ECB President said the central bank will work with the struggling nation “in monitoring the implementation of the recommendations by Greece.”

Today’s U.S. economic reports came in mixed. Monthly Retail Sales were better than expected while Michigan Sentiment fell unexpectedly.

The GBP USD fell sharply reversing Thursday’s strong rally. The weaker Euro and the bearish news from China were the catalysts behind Friday morning’s weakness. Traders are also concerned about the weak U.K. economy and the possibility of extended stimulus from the Bank of England. Finally, investors are worried that problems similar to the deficit issues facing Greece will flare up in the U.K.

The weaker Euro triggered a historically aggressive move by the Swiss National Bank on Friday. Traders say that the SNB intervened twice to weaken its currency although the events were accomplished with smaller than normal size. The action by the SNB is a sure sign that it will do anything to protect the recovery and the economy from deflation.

The sharp drop in crude oil and gold helped to fuel the rally in the USD CAD. Friday’s rally helped to erase most of Thursday’s losses. The intraday recovery in the U.S. equity indices helped to limit the gains.

Risk aversion helped to pressure the AUD USD and NZD USD on Friday. China’s move to tighten credit could have adverse effects on the Australian and New Zealand economies. This action will discourage demand for commodity-linked currencies.

Traders should watch for volatility next week. Chinese financial markets will be closed for a week which could limit volume but lead to increased volatility and wild swings. The U.S. financial markets will be closed on Monday which will give some Asian and European traders a two-day advantage in the Euro which could be affected by more news regarding the EU/Greek pact.

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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