Dollar Tumbles against Euro and Commodity-Linked Currencies

The U.S. Dollar hit a six-week low against theEuro driven by greater demand for risky assets and a hawkish comment from theReserve Bank of Australia.

The U.S. Dollar hit a six-week low against the Euro drivenby greater demand for risky assets and a hawkish comment from the Reserve Bankof Australia.A mid-morning report showing that the U.S. Services Sector slowed last monthalso contributed to the Euro’s rally on the prospects of a weaker outlook forthe U.S.economy.

The recent strength in the Euro versus the Dollar is anindication that investors are adjusting positions and absorbing the shift inthe recent economic data. Today’s turnaround in many of the Forex marketsdemonstrates investor willingness to buy riskier assets.

Recent weak U.S.economic releases have encouraged traders to move into a market psychologywhere poor data triggers Greenback weakness. Earlier in the year, investorsentiment was the opposite. At that time, weak data triggered flight-to-qualitybuying of the Dollar.

Although a reading over 50 still indicates an expandingeconomy, today’s ISM report showing a drop from 55.4 in May to 53.8 could be asign that the pace of the expansion is slowing. This news helped drive analready weak Dollar sharply lower almost immediately after its release. Laterduring the trading session, short-term overbought conditions helped theGreenback regain some of its earlier losses.

Last week’s upside momentum in the EUR USD continued thismorning. Technically, the main trend is up. The charts indicate that the markethas a clear shot at reaching a major retracement price at 1.2783.

Another sign that investors were shifting sentiment towardmore risky assets was the sharp rise in commodity-linked currencies. Early inthe trading session, the AUD USD reversed an overnight sell-off after theAustralian central bank issued a hawkish policy statement. The intra-day rallyput the Aussie in a position to form a closing price reversal bottom afterforming a support base inside of a retracement zone at .8469 to .8378.

Fundamentally, the market was supported by hawkish commentsfrom the Reserve Bank of Australia.In its policy statement, the Australian Central Bank kept its benchmarkinterest rate unchanged at 4.5%. It did, however, indicate that further rateincreases are to come even if inflation continues to increase and China’s economyslows. Today’s strong rally reflects the fact that speculators had been lookingfor more dovish comments from the RBA.

The strong rise in U.S. equities and a firm crude oilmarket also triggered a sharp break in the USD CAD. Today’s chart actionindicates that further weakness is likely now that it appears that investorshave decided to explore the long-side of riskier assets.

Today’s statement by the RBA also is a strong indicationthat the Bank of Canada will hike interest rates at its next meeting on July 20th.Speculators had been positioning themselves for a neutral stance by the BoC.Although the RBA left its benchmark rate unchanged, its hawkish comments leavesopen the strong possibility that another rate hike is imminent. Today’s sharpturnaround in the Loonie was most likely short Canadian Dollar traders making ahard, fast adjustment to the possibility of higher interest rates.

Weaker U.S.economic data and a shift in risk sentiment also pressured the USD JPY.Although this currency pair appears to be rangebound while forming a supportbase, traders can begin to anticipate a rally if U.S. equity markets begin to mounta short-covering rally. This rally will most likely be fueled by investorsreapplying the carry trade strategy to the Japanese Yen. When this occurs,investors borrow funds in the lower yielding Yen to invest in riskier assetssuch as U.S.equities.

Although there is likely to be profit-taking breaks alongthe way, there has been a notable shift in investor mentality toward more risk.Traders should be aware that weak U.S. economic reports are likely todrive traders out of the Dollar and into more risky assets. The logic behindthis shift is that central banks will continue to keep the markets liquid. Thismeans interest rates for the weaker nations will continue to remain low.Aggressive investors will be looking to find a place to put their money to workin an effort to earn better yields in exchange for higher risk.

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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