U.S. Dollar Gains on Investor Sentiment Shift

The U.S. Dollar is up against most major currencies as investors have shifted back toward risk aversion.

The U.S. Dollar is up against most major currencies as investors have shifted back toward risk aversion. Demand for lower risk is helping to boost the Japanese Yen while oversold conditions are helping the British Pound.

This morning the European Central Bank is expected to announce that interest rates will remain at 1.0%. Concerns over sovereign debt issues in the Euro Zone mean that fiscal austerity will be the new buzz phrase as almost every member of the European Union will be asked to slash their budgets especially the so-called PIIGS – Portugal, Ireland, Italy, Greece and Spain. This is likely to keep the pressure on the Euro in the long-run as it indicates a deflationary scenario driven by lower interest rates.

Investors are also monitoring today’s Greek bond issuance. Traders are most interested in how well this 10 year bond auction is being received. Early indications are showing that this auction may be oversubscribed. This is potentially bullish for the Euro in the short-run.

Short-term, the EUR USD has upside potential because of the massive amount of shorts in the market still betting on its demise. If the majority of the over 50,000 short positions are covered, then expect a strong short-covering rally to drive this market to a key 50% price level at 1.4009 over the near-term.

The GBP USD is trading a little better this morning. Bearish conditions have eased since the sharp break earlier in the week. Look for the Bank of England to leave interest rates unchanged at today’s meeting. Investors will be looking for language outlining a possible extension or expansion of its current quantitative easing program. If the BoE hints at flooding the market with more cash, then look for fresh downside pressure to develop.

The return of risk aversion is helping to pressure the USD JPY. Additional pressure is expected to come from Japanese investor repatriation ahead of the close of the fiscal year. Currently the USD JPY is testing a .618 retracement level at 88.24. Bearish traders seem reluctant to press the market at this area which could mean a possible intra-day short-covering rally may take place before the selling is resumed. A weak stock market could lead to an acceleration to the downside however.

The mixed to lower Euro is helping to buoy the USD CHF this morning. Currently this pair is trading inside of yesterday’s range. A rally in the Euro will send this pair lower and set it on course for a test of a major 50% downside target at 1.0513. Fresh Euro selling pressure will increase the chances of a Swiss National Bank intervention which will help rally the USD CHF.

The USD CAD is under pressure this morning. Expectations of a hike in interest rates by the Bank of Canada before the Fed, has been the catalyst driving this market lower this week. Watch for a possible “verbal intervention” by the Bank of Canada as this pair approaches the January bottom at 1.0224. The BoC is concerned that a rapid rise in its currency will hurt Canadian exports.

The return of risk aversion is helping to pressure the AUD USD and NZD USD. Traders seem concerned that the global economic recovery may be slowing which is helping to pressure demand for higher yielding assets. Pacific Rim traders are worried that China’s attempt to cool its economy will lead to less demand for raw materials and other exports for Australia and New Zealand.