Dollar Trades Flat after Mid-Session Euro Sell-off

The U.S. Dollar had a choppy, directionless day. The lack of event risk was likely the main reason for this as well as the easing of the Greek fiscal crisis.

The U.S. Dollar had a choppy, directionless day. The lack of event risk was likely the main reason for this as well as the easing of the Greek fiscal crisis. Trading could continue in a similar manner over the next few days because the first major report, Weekly Jobless Claims, is not due out until Thursday. This will be followed by the Retail Sales Report on Friday.

The Greenback started the New York session under pressure against most major currencies except the Japanese Yen. Trading was light and less volatile than last week’s action. Shortly before the New York session opening, the Dollar began to mount a slight comeback which accelerated into the mid-session.

The strong rally into the mid-session occurred as traders backed away from higher risk assets. Comments from German Chancellor Angela Merkel may have been the catalyst behind the weakness in the Euro. Merkel said that a Greek bailout is not on the table and pointed toward the no bailout rule in the European Union agreement as the reason behind her comment.

Another reason for the mid-session weakness in the Euro may have been comments from Greek Prime Minister Papadreou who hinted that he’d be willing to turn toward the International Monetary Fund for help if the EU didn’t come through with financial aid. His comments were most likely designed to light a fire under the EU to take action sooner.

Papadreou, in Washington to meet with the President and other government officials, also wants the U.S. to investigate recent trading activity in the Euro to look for signs of manipulation or excessive speculation. This action could prompt a rapid liquidation by hedge funds which would trigger a massive short-covering rally.

Risk appetite was up overnight, driven by strong demand from Asia, favoring riskier, higher yielding currencies. This helped drive up the AUD USD and NZD USD while putting the lower-yielding Japanese Yen. Approaching the mid-session, the Aussie and Kiwi weakened but were able to regain their strength into the close.

The primary driver of the higher Forex markets overnight was speculation that European nations would rescue Greece financially if needed. Traders reacted positively to comments from French President Nicholas. Over the weekend he said that the Euro Region nations are “ready” to help Greece. He also added however, “if it were necessary”.

These comments drove the EUR USD higher as they reduced the perceived risk of debt defaults throughout Europe. His comments also seemed to backup claims reported by the Wall Street Journal over a week ago that both France and Germany stand ready to provide up to $41 billion in bailout money provided the Greek government stay on course to reduce its debt load.

Last week, the Euro turned its trend to up on the daily chart after Greece agreed to make massive budget cuts. This helped to instill a little confidence in the country’s finances. In addition, a Greek 10-year bond auction went off without a hitch, further indicating renewed confidence in Greece’s ability to recover from its financial crisis.

The combination of fiscally responsible measures and the technical change in trend is an indication that investors are getting comfortable that Greece’s problems are not going to spill over into other sovereign nations such as Portugal or Spain.

Adding further to speculation that the tide may be turning up in the Euro was the news that net shorts dropped the week-ending March 2nd in the CFTC’s Commitment of Traders Report. This week’s net short figure showed a drop to 66,770 open positions versus 71,623 from late February. There are still a tremendous amount of shorts in the market, so this change most likely reflects light position paring.

The USD CHF was down overnight while the NZD USD traded higher. The Swiss Franc was trading higher because the stronger Euro reduces the possibility of a Swiss National Bank intervention. In addition, the SNB meets later this week on March 11th. Short-covering due to oversold conditions helped to drive the New Zealand Dollar higher. On March 10th, the Reserve Bank of New Zealand meets to discuss monetary policy. It is expected to leave interest rates unchanged due to the weak economy.

The USD CAD fell as global investor demand picked up for the Canadian Dollar. Traders have been encouraged to by the CAD due to the relative safety of the Canadian banking system. In addition, last week it was reported that Canadian GDP rose more than expected. The chart indicates that 1.0224 is the next downside target. This would put the market at a price which triggered a Bank of Canada verbal intervention in January.

The GBP USD made an attempt to rally overnight before turning down during the New York session. The British Pound continues to remain the weakest currency because of the poor U.K. economy, the widening budget deficit, a dovish monetary policy and political uncertainty.