Speculators Increase Pressure on Euro

The Euro remained under pressure on Monday despite anannouncement by Greece,the European Union and the International Monetary Fund that a 3-year bailoutpackage has been reached which will provide as much as $146 billion for theailing nation.

The Euro remained under pressure on Monday despite anannouncement by Greece,the European Union and the International Monetary Fund that a 3-year bailoutpackage has been reached which will provide as much as $146 billion for theailing nation.

The bailout agreement which was highly expected failed torestore confidence to the Euro, most likely because speculators still believethe sovereign debt problems in the Euro Zone are likely to spread to Spain, Portugaland Ireland.

Each recent rally in the Euro has been met by more sellingpressure which has triggered a break to a new low for the year. This pattern isexpected to continue as the direction of the Euro is clearly in the hands ofthe shorts. Recently released Commodity Futures Trading Commission Commitmentof Traders data shows that hedge funds and other large speculators aredictating the direction of this market. The report shows that these largetraders increased net wagers on a Euro drop by 25% to 89,013 contracts in theweek ended April 27th.

Clearly if large traders believed that the bailout packagewas going to save the Euro, the number of net shorts would have decreased. Theincrease in the number of net shorts indicates that bearish traders are gainingconfidence in the possible demise of the Euro. Last week the S&P Corp.downgraded the debt rating of Spainand Portugal.This action helped throw fuel on the fire as it no doubt confirmed to thebearish traders that they were trading the Euro from the right side.

Although the Greecebailout package may be providing the nation with some breathing room, themarket is saying that traders remain cautious. It is easy for the policymakersto require beaten countries like Greece to agree to more austerefinancial measures, but it is another thing to make them follow the new rules.

The Euro is also under pressure from traders who simplybelieve the Euro Zone is going to be mired in this financial crisis for sometime. In addition to expectations of contagion in the region, some bearishtraders are increasing bets that the European Central Bank will not be able toraise interest rates during a time period when most major industrial nationsare considering rate hikes. Other traders believe that the situation in theEuro region will grow to the point where credit markets become locked up muchlike they were during the height of the Lehman debacle. Putting everythingtogether, it looks as if the situation is likely to worsen which means downsidepressure will remain on the Euro.

The weakness in the Euro and concerns about Europeansovereign debt issues also spread to the GBP USD on Monday. Not only do BritishPound investors have to be worried that its sovereign debt will get downgradedby a credit ratings service, but they also have to deal with the possibility ofhung parliament after the May 6th election.

According to recent polls, the U.K. election is too close to call.This means the election may result in no party having a majority in parliament.Without a majority calling the shots, it seems unlikely that the parliamentwill be able to tackle its sovereign debt problems and its budget deficit. Without guidance and direction, thegovernment may be unable to come up with a viable plan to fight its fiscal issues,if this occurs, then look for the U.K. debt rating to be slashed at some pointthis year. This action will compound the weakness in the British Pound anddrive the currency lower.

While the European Central Bank has its hands tied regardinginterest rates, the Fed is slowing moving closer to raising rates. This isincreasing speculation that the Euro will weaken, driving up demand fordollar-denominated assets. Stronger gold, crude oil and stocks rose on Monday,helping to boost the Canadian Dollar. This helped the USD CAD weaken after acouple of days of speculation that this pair would rise because of thepossibility of an intervention by the Bank of Canada.

Late last week, BoC Governor Mark Carney said that a highpriced currency can have an impact on inflation and monetary policy. Thisseemed to be a subtle hint that the Canadian Dollar was getting a little toohigh. It also served as a verbal intervention, leading to a short coveringrally in the USD CAD.

Traders should watch this currency pair carefully over thenear-term. Although expectations are for the BoC to begin increasing interestrates as early as June, the USD CAD may get volatile as the two bearish andbullish forces clash. If demand for higher risk drops, driving stocks lower,then look for the Canadian Dollar to fall. Renewed interest in higher yieldingassets could drive the Canadian Dollar back toward parity.

Tonight, the Reserve Bank of Australia is expected to announceits policy statement. Traders expect the RBA to increase its benchmark rate by.25 basis points to 4.50%. For months the RBA has said it will continue to hikeinterest rates until they reach a normal level. According to RBA GovernorStevens, the normal range is 4.50% to 5.00%.

Recent policy statements suggested that the growing globaleconomy is the main reason to increase rates. Recent economic reports suggeststhat inflation if high. This is another reason why the RBA is expected toincrease rates.

The debt problems in Greeceand the Euro Zone have not had an impact on Australia, but the RBA may takethis into consideration when discussing the rate hike. Unless it sees theproblem having an effect on the Australian economy, don’t expect it to get inthe way of an interest rate hike. Furthermore, China is expected to tighten ratessoon. This issue may be raised by Australian policymakers, but not expected tohurt the economy to the point where an interest rate hike isn’t warranted.

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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