Euro Gains Overnight; Risk Appetite Weakens U.S. Dollar

The U.S. Dollar is under pressure overnight against most major currencies except the Japanese Yen.

The U.S. Dollar is under pressure overnight against most major currencies except the Japanese Yen. Trading has been light and less volatile than last week’s trading conditions. Shortly before the New York session opening, the Dollar is mounting a slight comeback and trading off its lows against a few of its majors.

The lack of event risk is likely to make the movement of the Dollar the catalyst and market direction driver this week. The first major report is Thursday’s Weekly Jobless Claims, followed by Friday’s Retail Sales Report.

Risk appetite was up overnight, driven by strong demand from Asia, favoring riskier, higher yielding currencies. This is helping to drive up the AUD USD and NZD USD while putting the lower-yielding Japanese Yen.

The primary driver of the Forex markets overnight is speculation that European nations would rescue Greece financially if needed. Traders are reacting 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 is 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. Should the major hedge funds all decide to head for the exits at the same time, look for a huge short-covering rally.

The USD CHF is down overnight while the NZD USD is higher. The Swiss Franc is 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 are helping 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 is falling as global investor demand is picking 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.

Finally, the GBP USD has been see-sawing overnight. It is possible that the current short-covering rally could move up into a 50% level at 1.5297 before new selling pressure begins. The British Pound continues to remain weak because of the weak U.K. economy, the widening budget deficit, a dovish monetary policy and political uncertainty.