Aussie Dollar Rallies on Interest Rate Talk

The Australian Dollar rebounded on Tuesday following athree-day setback boosted by stronger U.S. equity markets and increaseddemand for currency-linked commodities. Speculation mounted that the centralbank would raise interest rates before the end of the year following news thatthe Asian Development Bank increased its growth forecast for China. Thisencouraged investors to buy the Aussie in anticipation of improved economicconditions because of increased demand for Australian raw materials.

The Australian Dollar rebounded on Tuesday following athree-day setback boosted by stronger U.S. equity markets and increaseddemand for currency-linked commodities. Speculation mounted that the centralbank would raise interest rates before the end of the year following news thatthe Asian Development Bank increased its growth forecast for China. Thisencouraged investors to buy the Aussie in anticipation of improved economicconditions because of increased demand for Australian raw materials.

Technically, the AUD USD maintained its uptrend despite theshort-term correction to .8632. The strong move on Tuesday puts the Aussie in aposition to take out the swing top at .8870 and the .618 retracement level at.8883. A penetration of these two levels is likely to trigger an accelerationto the upside.

The strong rise in the Australian Dollar along with talk ofanother interest rate hike by the Reserve Bank of Australia triggered a strong rallyin the New Zealand Dollar. With the Aussie’s likely to hike rates before theend of the year and the Bank of Canada setting its benchmark rate 25 basispoints higher this morning, Kiwi investors gained confidence that the ReserveBank of New Zealandwould be next in line to adjust interest rates higher.

Technically, the NZD USD rebounded after testing the 50%level of the .6794 to .7303 range. The main trend is up, but the market may runinto minor resistance at .7166 to .7198.

After trading in a tight range most of the morning, pressurefrom rising equity prices and commodities finally ignited a sell-off in the USDCAD. Early this morning, the Bank of Canada hiked its benchmark interest rateby 25 basis points. This increase was in line with expectations, but the dovishtone of the policymaker’s statement helped hold the Dollar/CAD inside a tightrange most of the morning. Once U.S.equity markets rebounded from a weaker opening, traders aggressively bought theCanadian Dollar.

Technically, the USD CAD is still locked inside of tworanges. The broad range is .9929 to 1.0853 with a mid-point of 1.0391. Thenarrower range is 1.0853 to 1.0137 with a mid-point of 1.0495. Currently thispair is trading between the mid-points of each range.

A rumor of a possible intervention by the Bank of Japanhelped underpin the USD JPY on Tuesday. A turnaround in the stock marketpressured demand for lower yielding currencies, thereby adding to thebullishness of the Dollar/Yen. Although an intervention from the BoJ ispossible, traders are taking a precautionary approach to the long side due tothe fact that the strength in the Yen has been caused by a weakening U.S. economyand not excessive speculation. The BoJ is worried that the strengthening Yenwill lead to decreased demand for Japanese exports. Investors are likely toremain short until the swing top at 89.15 is violated. A breakout above thispoint will turn the main trend to up, setting up a possible rally to 90.62.

The British Pound rebounded against the Euro after Hungary’s smaller-than-expecteddebt auction renewed sovereign debt concerns in the Euro Zone.

Early in the session the British Pound was under pressuredue to concerns about the economic recovery triggered by a weaker-than-expectedbudget deficit and lower mortgage approvals.

Technically, the GBP USD survived a two-day break whilekeeping the main up trend in tact. Tuesday’s strong upside momentum indicatesthe market may have enough power to test the last swing top at 1.5471. A newmain bottom at 1.5152 may also form, adding to the Pound’s growing series ofhigher bottoms.

The biggest concern facing the Pound at this time is whetherthe U.K.economy can strengthen enough to trigger a rate hike by the Bank of England.Traders are extremely worried that the economy will weaken further because ofthe newly approved austerity measures. This would make the U.K.’sdebt rating vulnerable to a downgrade by the ratings agencies.

The EUR USD traded lower, pressured by sovereign debtconcerns in Europe following poor demand for Hungary’s debt. Profit-taking aheadof Friday’s release of the European bank stress tests results added to theweakness. Traders are nervous about what the report will reveal. Some feel thetest wasn’t stringent enough; others feel that it will show several banks needto raise more capital.

After testing a Fibonacci retracement level at 1.2998 andtrading all the way to 1.3028, the Euro posted a daily closing price reversaltop on Tuesday. This is the second such reversal in two days signaling increasingselling pressure. A follow-through to the downside is needed to confirm thereversal. Watch for weakness to develop if the 50% level at 1.2783 fails toprovide support.

Over the near-term, stronger demand for higher risk assetsis likely to continue to underpin the commodity-linked currencies.Profit-taking is expected to continue to pressure the Euro as traders awaitFriday’s European bank stress test results.

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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