Dollar Sinks on Change in Banking Regs, Chinese Economy

The U.S. Dollar is trading sharply lower on increased demandfor risky currencies following the announcement of an agreement by globalbanking regulators to increase capital requirements. Traders are celebratingthe announcement because it was much softer than banks anticipated and hasremoved some of the uncertainty that has been lingering in the bankingcommunity.

The U.S. Dollar is trading sharply lower on increased demandfor risky currencies following the announcement of an agreement by globalbanking regulators to increase capital requirements. Traders are celebratingthe announcement because it was much softer than banks anticipated and hasremoved some of the uncertainty that has been lingering in the bankingcommunity.

Over the week-end, global banking regulators agreed to closeto triple the size of capital reserves that banks must hold against losses. Therequirement, however, is not expected to kick-in until 2019 which took thepressure off banks to begin increase capital immediately. The new regulationalso gives the banks time to raise the new capital requirement through earningsrather than through the shifting of current capital.

On Saturday, Chinaposted a report which showed industrial production was stronger-stronger thanexpected. Chinese retail sales also rose while August inflation of 3.5% wasreported at the pre-report estimate. This helped squelch rumors of anotherround of monetary policy tightening by the Chinese central bank.

Last week money left the U.S Treasury and Gold marketsindicating that traders were beginning to lean toward an investment in higheryielding assets. This action is partially responsible for the strong rally inequity markets and the higher yielding currencies overnight.

The key to sustaining the rally in the higher yieldingcurrencies will be whether U.S.investors chase the equity markets higher from the opening or if they wait fora pull-back. The sharp up move in the equity markets has put stocks in ashort-term overbought position rather quickly which may indicate a round ofearly weakness this morning.

The EUR USD is trading sharply higher this morning afterpiercing a downtrending Gann angle which has been holding the market back sinceAugust 6. Upside momentum is strong but has to continue to build in order toreach the next chart objective at 1.2960.

The GBP USD is trading higher, but not as strong as the Euroor the higher yielding currencies. The British Pound continues to findresistance on a downtrending angle from the 1.5997 top at 1.5477 today.Continue to look for downside pressure as long as the market remains below thisangle. Look for an acceleration to the upside once this angle is penetrated.

There has been very little movement in the USD JPY despitelast week’s daily closing price reversal bottom which indicates a chance for abreakout to the upside to 84.62. A rally in U.S. equity markets this morningmay trigger renewed interest in the carry trade which could be bullish for theDollar/Yen. Traders are also waiting for some news from the Japanese governmentand the Bank of Japan regarding an intervention. The uncertainty regarding thismatter may be keeping traders on the sidelines.

Overall, the theme today is bullish which should helpunderpin the Australian, New Zealand and Canadian Dollars. Watch for anearly session set-back if U.S.equity markets pull-back after the opening.

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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