The falling Euro helped drive down the British Pound onTuesday. This news came on the heels of bearish economic reports overnight aswell as a shift in the polls which indicated no clear winner was emerging 10days before the election.
The U.S. Dollar was up substantially against most majorcurrencies with the exception of the Japanese Yen as demand for higher riskcurrencies plunged following a downgrade of Greeceand Portugaldebt by the S&P 500 ratings company. Volatility is high at the moment andcould continue to remain high on Wednesday even though both the Federal Reserveand Reserve Bank of New Zealand are set to release their recentpolicy statements.
The falling Euro helped drive down the British Pound onTuesday. This news came on the heels of bearish economic reports overnight aswell as a shift in the polls which indicated no clear winner was emerging 10days before the election. This uncertainty made traders nervous because it maylead to a hung parliament which would curtail any attempts to fix the budgetdeficit. The news that U.K.retail sales were less than expected as well as lower than expected mortgageapprovals suggests the consumer may be cutting back on spending.
The Euro made a new low for the year after plunging sharply afterthe S&P Corp. lowered Greece’sratings to below-investment grade and cut Portugal’s long-term ratings fromA+ to A-. The cut to junk status by S&P Corp, was another sign thatconditions were expected to worsen. AddingPortugalto the mix indicated that the rating service believes the crisis is spreadingand the outlook remains negative.
What the S&P downgrade has effectively down was givepermission to the hedge funds to continue to aggressively short the Euro. It has also served as a warning to Ireland and Spain to get their finances inorder. Furthermore, the downgrade also signaled that the S&P Corp. was notgoing to wait for the European Union and the International Monetary Fund toreach a decision regarding the bailout package for Greece.
Hedge funds are most likely licking their chops over thedowngrade news. It seems at times they have taken heat for exasperating thesituation in Greece,but with today’s downgrades, it appears their shorting activity has beenvindicated.
The announcements by the S&P Corp. sent U.S. stockmarkets sharply lower while substantially lowering demand for higher riskassets. Commodity linked currencies such as the Australian Dollar, New ZealandDollar and Canadian Dollar broke sharply lower on the news while demand forlower risk assets drove the Japanese Yen higher.
From a technical perspective there is nothing to stop theEUR USD from trading down to 1.3000 over the near-term. The last two times theEuro made a new low for the year an announcement came out to trigger ashort-covering rally. This time no such announcement is expected so the Euro islikely to accelerate to the downside.
The news that broke the Euro also drove the USD CHF higher.Traders are now anticipating the Euro Zone’s economic problems to spread to theSwiss economy. In addition, traders anticipate the Swiss National Bank to be alittle more active in the intervention market in an effort to protect itseconomy and the Swiss export market.
In one day the USD JPY had retraced more than 50% of the91.59 to 94.35 range to .92.97. Greater demand for lower risk assets helped todrive the Japanese Yen higher. Traders dumped stocks and repatriated funds backto Japanin an effort to repay borrowed funds. Traders are expected to continue to keepthe pressure on the Dollar/Yen as long as stock indices remain under pressure.
Falling Gold and Crude Oil helped drive the USD CAD sharplyhigher immediately after the announcement of the downgrade. After forming aclosing price reversal bottom at .9929 late last week, the Dollar/CAD has foundnothing but buying support from institutions and banks. Tuesday’s strong actionhas this market in a position to challenge the recent top at 1.0215. A breakoutover this level will turn the main trend higher. Look for upside momentum tocontinue if investors continue to dump higher priced assets. Gains could alsobe limited if gold speculators decide to drive this market higher as a hedgeagainst a collapse of the Euro.
The drop in demand for higher priced assets helped to drivethe AUD USD sharply lower. Early Tuesday morning the Aussie plunged through 50%support at .9194 and seems well on its way to the .618 level at .9148. Thefiring of sell stops under a pair of Gann Angles at .9221 and .9230 also helpedtrigger an acceleration to the downside. The trade through .9157 helped turnthe main trend to down. The weekly chart suggests that a move to .8982 islikely over the near-term.
After breaking through a pair of retracement levels onMonday and signaling an upside breakout, the NZD USD has reversed course and isnow feeling selling pressure. A shift in risk sentiment out of higher yieldingcurrencies caused Tuesday’s break. Although this market bounced off of anuptrending Gann Angle at .7092 on Tuesday, this angle has clearly beenidentified as the key breakdown point. A move through .7096 on Wednesday is likelyto trigger an acceleration to the downside.
On April 28th, the Reserve Bank of New Zealandwill announce its interest rate decision and policy statement. Althoughinterest rates are expected to remain the same this month, talk has beencirculating that the policymakers are likely to release a more hawkishstatement and may actually be planning to raise interest rates sooner thanexpected. Today’s trading action indicated that traders were reducing risk inthe Kiwi as sentiment was shifting away from risk. Should more negative newshit the markets regarding Greecethen look for further downside pressure.