Late Session Surge for Risk Pressures U.S. Dollar

The U.S. Dollar declined into the close after trading in a tight range most of the day. A strong surge in the equity markets late in the session confirmed investor demand for risky assets, thereby pressuring the lower yielding Dollar.

The U.S. Dollar declined into the close after trading in a tight range most of the day. A strong surge in the equity markets late in the session confirmed investor demand for risky assets, thereby pressuring the lower yielding Dollar.

At times on Thursday, traders were demanding lower yielding currencies in response to an overnight report that showed China’s consumer-price index spiked higher in February. Investors speculated that its central bank would have to 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.

The Dollar extended its earlier gains after economic reports showed the trade deficit unexpectedly shrank and weekly initial claims for jobless benefits fell. These gains were short-lived however, as investor demand for higher-yielding assets picked up late in the trading session.

The USD JPY finished unchanged after a choppy, two-sided trading session. Earlier in the day, it broke on speculation that China may have to hike interest rates to curb economic growth but then rallied when U.S. equity markets weakened. Finally at the end of the day, the Dollar was able to mount a comeback against the Japanese Yen as the stock market soared into the close.

The USD CAD dropped hard after early session strength and finished lower. The early session rally was triggered when this market failed to attract sellers after reaching its lowest level since October 2009. Oversold conditions and less demand for higher risk assets also helped to contribute to the early strength. The strong rally late in the trading session drove up demand for higher risk assets, thereby pressuring the USD CAD into the close.

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 closed higher in light trading. Today’s action put this market in a position to challenge the recent top at 1.3735 while in the process, forming a new main bottom at 1.3530. Technically, this currency is trading in a range. A support base is being built which suggests an impending rally, but this market needs a catalyst to drive it through the recent top. 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 on Thursday 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 rally in the Euro helped weaken the USD CHF. Accelerating downside pressure could trigger a further decline into a major 50% level at 1.0513.

The GBP USD closed higher 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%. The fact that this market was able to hold onto most of its overnight gains could be a sign that the recent selling pressure has dried up. This could mean a short-covering rally is imminent. Gains could be limited however because aggressive 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 but was able to recover most of the loss on renewed demand for higher yielding assets into the close. The lower stock market helped contribute to the weakness, but led the rally later in the session. 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 finished lower after the Reserve Bank of New Zealand voted to leave its benchmark interest rate unchanged. The inability to close higher after the strong late session equity market rally confirms the weakness in the currency.

In a statement after the monetary policy announcement, 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.