U.S. Dollar Trading Mostly Lower; Forex Traders Indecisive

The U.S. Dollar is trading mostly lower as Forex traders seem indecisive about taking a side in the market today.

The U.S. Dollar is trading mostly lower as Forex traders seem indecisive about taking a side in the market today.

At times, traders have been demanding lower yielding currencies perhaps in response to an overnight report that showed China’s consumer-price index spiked higher in February. Investors have been speculating since the release of the report showing that its central bank will raise interest rates to curb economic growth. The inflation report showed an acceleration from the year-earlier month, to a greater-than-expected pace of 2.7%. The higher growth was tied to greater-than-expected gains in fixed-asset investment, bank lending, and industrial production.

Today’s U.S. economic reports, international trade and weekly job claims, were mixed, but pressure has been on higher yielding assets anyway. Several times today all four major asset classes – the Dollar, Gold, Stocks and Treasuries – were trading lower. This action suggests that there may be a quarterly rebalancing or reallocation taking place.

The USD JPY has seen choppy, two-sided trading. It broke on speculation that China may have to hike interest rates to curb but then rallied when U.S. equity markets weakened.

The USD CAD is trading slightly better at the mid-session after reaching its lowest level since October 2009. Oversold conditions and less demand for higher risk assets is helping to contribute to the strength. The bigger picture still suggests that the stronger currency is the Canadian Dollar. Higher oil prices and the prospect of rising Canadian interest rates have helped increase the view that the Canadian Dollar could test parity. Investors are beginning to believe that the Bank of Canada is likely to hike interest rates before the Fed.

The Euro is trading better at the mid-session. Technically this currency is trading in a range and building a support base while waiting for a catalyst to trigger an upside breakout. The easing of fiscal tensions in Greece is contributing the most to the developing bullish tone. Traders seem to be waiting for some event to shake up the record number of shorts in the market in order to trigger a short-covering rally.

The Swiss National Bank voted to leave interest rates at historically low levels while reiterating its stance to intervene decisively if necessary to protect the currency. It also raised its outlook for 2010 inflation from 0.50% to 0.70%. The direction of the USD CHF is being controlled by the movement of Euro.

The GBP USD is trading better after a Bank of England report predicted that inflation would be 2.5% this time next year. This projected increase was slightly better than the November guess of 2.4%. This market has been able to hold onto most of its overnight gains, but traders shouldn’t read too much into today’s action. Shorts still feel that there is much more potential to the downside because of the weak economy, political uncertainty and the BoE’s dovish tone.

The AUD USD fell overnight on speculation China will have to raise interest rates to curtail its economic growth and has not been able to recover because of weaker demand for higher yielding assets. The lower stock market is helping to contribute to the weakness. Should the U.S. equities markets turn positive, then Aussie shorts are likely to cover, sending this market higher. There is not question the Australian economy is strong, but speculators may begin to question whether it can sustain this growth without the support of China.

The NZD USD is trading lower at the mid-session after the overnight announcement by the Reserve Bank of New Zealand to leave its benchmark interest rate unchanged. Lower stock prices are helping to pressure the Kiwi, but a late session recovery in U.S. equity markets may trigger a short-covering rally into the close.

NZRB Governor Bullard said weak consumer spending and higher bank-funding costs are slowing the recovery. He stated further, “Households are still cautious with house sales and credit growth remaining subdued”. Given the tone of this report, investors are speculating that interest rates will remain low until at least June, but some are even projecting until the end of the year.