China Loosens Currency Peg driving up Demand for Higher Risk Currencies

Higher risk currencies are set to surge today after China loosenedits reins on the Yuan over the week-end. Although the timing of the move by Chinato allow its currency to appreciate against the Dollar came as a surprise, theaction followed months of serious negotiations between the U.S. Treasury andthe Chinese government.

Higher risk currencies are set to surge today after China loosenedits reins on the Yuan over the week-end. Although the timing of the move by Chinato allow its currency to appreciate against the Dollar came as a surprise, theaction followed months of serious negotiations between the U.S. Treasury andthe Chinese government.

Global demand for goods and services is expected to increasebecause the action by Chinamakes imported goods less expensive for Chinese consumers. A strong Yuancompared to the Dollar should be most beneficial for U.S. manufacturers and exporters.Investors are selling the Dollar this morning and aggressively buying commodity-linkedcurrencies. This theme is expected to set a strong tone for higher risk currenciesthis morning while putting pressure on the Greenback.

The AUD USD gapped higher overnight, taking out a major 50%level at .8727 while setting up a further rally to the Fib retracement level at.8823. The news from Chinais expected to be extremely beneficial to the Australian economy.

Greater demand for risk is also driving up the NZD USD.Traders are buying in anticipation of greater demand for New Zealandgoods and services. .7150 is the next upside target. The steepness of the rallyindicates that the currency is nearing overbought status. This could slow downthe rate of ascent but not necessarily change the trend.

The news from China initially triggered a sharprise in the EUR USD which has since weakened as traders shift their interest tocurrencies which will benefit the most from the strong Yuan. Currently the Eurois starting to form a closing price reversal top. This indicates that theselling is greater than the buying at current price levels and could fuel thestart of a 2 to 3 day correction. Also this morning, the main trend turned upon the daily chart, but this move failed to attract any fresh buying.

Technical factors are contributing to a weaker GBP USD thismorning after a strong surge overnight. Traders began selling the British Poundafter an overnight rally ran into resistance at a .618 price level at 1.4947.Support is trying to be established at a 50% level at 1.4810. A failure to holdthis price should trigger an acceleration to the downside.

Currently, the British Pound is setting up a daily closingprice reversal top. This should trigger the start of a 2 to 3 day break back tosupport at 1.4040. Money is clearly shifting out of the European theatre andinto the Pacific Rim currencies.

Strong equities and commodities are also triggering a breakin the USD CAD. Downside momentum is building which could drive this currencypair into the nearest support area at 1.0110.

The USD JPY reversed earlier weakness overnight after China made amove to boost the value of the Yuan. Traders are moving money out of the loweryielding Japanese Yen and into more risky assets in an effort to catch a betterreturn. The rise in global equity markets is also leading to increased interestin the carry trader. This trading strategy means increased borrowing in Yen,the subsequent selling of the Yen and a conversion into Dollars. This explainstoday’s rise in the USD JPY.

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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