Aussie Dollar Continues to Power Higher

The Australian Dollar continued its rally which started onTuesday following hawkish comments from the Reserve Bank of Australia.

The Australian Dollar continued its rally which started onTuesday following hawkish comments from the Reserve Bank of Australia. The RBA’s policystatement turned around a sluggish market by stating that interest rates arelikely to rise despite concerns about inflation and a possible slow down in theChinese economy. Greater demand for higher risk assets also fueled today’srally.

Technically the Aussie is in a strong position to rallyfurther. Today’s close was on a .618 retracement price at .8651, but upsidemomentum indicates that this potential resistance zone level is not likely tohold. This sets up the market for a further rally to the recent main top at.8858.

The formation of the secondary higher top in the New ZealandDollar is also a strong indication of higher markets to follow. The ReserveBank of New Zealandis likely to follow-the direction of the RBA and hike interest rates a secondtime in as many months when it meets on July 28th. Traders are at leastindicating this scenario by covering short-positions in anticipation of anotherrate hike. Like the Australian Dollar traders, Kiwi traders seem to have abetter outlook for Chinathan the rest of the world.

The USD JPY failed in its attempt to make a new move lowearly this morning. The strong rally in the U.S. equity markets encouragedtraders to buy Dollars and sell Yen in a resumption of the carry tradestrategy. While a weak outlook for the global economy drove investors into thelower-yielding Yen, a strong earnings-based equity market rally is likely todrive them out of the Yen and back into higher yielding assets.

After overnight weakness due to concerns over the slowingglobal economy and the upcoming European bank stress tests, the Euro andBritish Pound mounted strong recovery rally and finished the day modestly higher.

On Thursday both the European Central Bank and the Bank ofEngland meet to decide monetary policy. Both central banks are expected toleave interest rates unchanged but the markets could move depending on what issaid in the subsequent policy statements and press conferences. Traders will beparticularly interested in what ECB President Trichet will have to say aboutthe state of the Euro Zone economy as well as his opinion on the scope of thebank stress tests.

Today’s early strength in the U.S. Dollar and subsequentweakness later in the session is an indication that traders aren’t sure aboutwhich fundamental event is driving the markets. Lately it has been the weaker U.S.economic reports that have been sending investors out of the Dollar and intomore risky assets. Overnight it was concerns over the weak global economy andthe European bank stress tests. Volatility is expected to remain high in theForex markets as investors wrestle with the soundness of the European bankbalance sheets and the potential loss of momentum in the global economy.

The strong rise in the Euro is keeping the uptrend intact.The daily chart indicates there is plenty of room to the upside with aretracement cluster at 1.2783 the next likely target.

Technically, the British Pound is in an uptrend, controlledby the series of higher tops and higher bottoms. Look for an acceleration tothe upside when the swing top at 1.5228 is violated. The weekly chart indicatesthat this market could be headed toward 1.5635 over the near-term.

Don’t expect too much action overnight as traders havepretty much positioned themselves ahead of Thursday morning’s ECB and BoEpolicy announcements. With both central banks expected to keep interest ratesat historically low levels, the movement in these currencies is likely to bedelayed until traders hear from the Trichet of the ECB and King of the BoE.Trichet’s comments will be listened to more closely as he has more to commenton. Emphasis will be placed on his assessment of the European bank stresstests. Traders want to hear that Trichet feels the tests will be stringentenough so that they can get a correct risk assessment of the condition of theEuropean bank balance sheets.