Aussie Dollar Rises as Traders Chase Yields; Traders Eye Key Inflation Data

The Australian Dollar surged on Monday as rising equitymarkets drove up demand for higher yielding assets. Traders are also chasingthe higher yield in Australiadue to the weaker outlook for the U.S. economy.

The Australian Dollar surged on Monday as rising equitymarkets drove up demand for higher yielding assets. Traders are also chasingthe higher yield in Australiadue to the weaker outlook for the U.S. economy.

Early Monday morning, the Aussie’s rally slowed a bit due toa disappointing Producer Price Index report. The PPI rose 1.0% compared with aforecast 1.5% rise. After a slight retreat from the early session high, themarket regained its momentum to test .9000 in the U.S. session for the first timesince the middle of May.

Although initially concerned with the modest gain in thePPI, traders quickly turned their focus on Wednesday’s Consumer Price Index.Traders are looking for this report to show an increase of 0.8%, keeping inline with the Reserve Bank of Australia’soverall target band of 2% to 3%. A report greater than the estimate could bethe trigger which gives the RBA a reason to hike its benchmark rate once againat the next policymakers meeting on August 3.

The RBA has been on the sidelines since May, choosing toignore the economy over the short-term because of the financial problems in Europe at the time. Now that is seems the Europeanfinancial system is sound, the RBA will shift sentiment back to the economy.The Australian economy has been strong but traders will have to decide onWednesday whether it has been strong enough to warrant another rate hike basedon the inflation data. A spike in consumer prices will put inflation over thetarget band, setting the table for a 25 basis point hike to 4.75%.

Despite questions about how the European bank stress testswere conducted, investors seemed satisfied enough with the results early Mondaymorning to underpin the Euro while waiting for fresh news regarding the U.S.housing market.

Following the release of U.S. new home sales data which sawan increase in June by more than economists had forecast, the Euro rallied andis now pressing a minor .618 retracement level at 1.2998. This puts this pairin a position to challenge last week’s high at 1.3028.

Stocks extended their gains following the housing report,driving up demand for higher risk assets, helping the Euro maintain the upwardmomentum which helped drive the market higher late last week.

The British Pound finished higher but momentum slowed whenthe market neared a weekly swing top at 1.5523. A breakout over this level willturn the main trend up and set up a possible acceleration to a major 50%retracement level at 1.5635.

Fundamentally the Sterlingis being driven higher by last week’s release of better than expected secondquarter GDP. Last week’s news that the U.K. economy expanded by a strong1.1 percent was a sign the economy was more stable than previously estimated.This news led some investors to believe that the Bank of England will have toseriously consider raising its benchmark interest rate sooner than expected.

As the Pound approaches a key retracement level at 1.5635,investors have to realize that the second quarter expansion took place beforethe government implemented its proposed deep spending cuts and tax hikes. Thebiggest fear amongst bullish traders is that the government’s proposedausterity measures will curtail the gains that the economy is currentlyshowing.

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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