Dollar Sinks on Change in Banking Regs, Chinese Economy

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.

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 investors liquidated their positions in U.STreasury and Gold markets, indicating that traders were beginning to leantoward an investment in higher yielding assets. This action was partiallyresponsible for the strong rally in equity markets and the higher yieldingcurrencies overnight and throughout today’s U.S. trading session.

The U.S. Dollar traded sharply lower on increased demand forrisky currencies following the announcement of an agreement by global bankingregulators to increase capital requirements. Traders celebrated theannouncement because it was much softer than banks anticipated and removed someof the uncertainty that had been lingering in the banking community.

The key to sustaining the rally in the higher yieldingcurrencies today was the strong rally in the U.S. equity markets. Although therewas a sharp sell-off at midday, aggressive investors bought the dip, helping tounder pin the Australian, New Zealand and Canadian Dollars.

The Euro was up over 1% against the Dollar as an agreementby global regulators on the size of a bank’s capital reserves fueled traderappetite for risk.

The EUR USD traded sharply higher after piercing adowntrending Gann angle which has been holding the market back since August 6.Upside momentum was strong but has to continue to build in order to reach thenext chart objective at 1.2960.

The size of the support base built recently and the threebottom formation at 1.2587, 1.2625 and 1.2644 suggests this market has a strongchance to break out over the last swing top at 1.2919 and reach a .618 pricelevel target by September 16.

The GBP USD traded higher, but not as strong as the Euro orthe higher yielding currencies. The British Pound continued to find resistanceon a downtrending angle from the 1.5997 top at 1.5465 tomorrow. Continue tolook for downside pressure as long as the market remains below this angle. Lookfor an acceleration to the upside once this angle is penetrated.

The USD JPY sold off despite last week’s daily closing pricereversal bottom which indicated a chance for a breakout to the upside to 84.62.A rally in U.S.equity markets this morning failed to trigger renewed interest in the carrytrade which could’ve be bullish for the Dollar/Yen. Traders were also waitingfor some news from the Japanese government and the Bank of Japan regarding anintervention. The uncertainty regarding this matter may be keeping traders onthe sidelines.

The strong rally in the Treasury Bond market despite greaterdemand for risky currencies and equities may be an indication that investorsare still uncertain about the U.S.economy. This may be the reason why the Japanese Yen showed strength today.

Besides the threat of an intervention, the equity marketsremain rangebound. Until these markets can break out of this range, traders maybe skeptical about reviving the carry-trade. This will keep the pressure on theUSD JPY.

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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