U.S. Dollar strengthens Overnight; Risk Aversion Highlighted

Once again risk aversion is taking center stage as traders are buying the Dollar and shedding higher risk currencies.

Once again risk aversion is taking center stage as traders are buying the Dollar and shedding higher risk currencies. The main concern driving the Dollar higher overnight is Greece’s ability to obtain financial aid. Traders are pricing in the strong possibility that Greece will not receive aid from the European Union and be forced to turn to the International Monetary Fund for help.

Although Greece agreed to austere budget cuts to pacify the EU, it seems that despite these moves members still are against providing aid to the ailing Greek economy. Greece needs the funding to get through this difficult transition period but cannot afford to go to the open market to borrow money because of the high interest rate it would have to pay. The cost to borrow would be prohibitive and the amount of money required to service the debt would cripple the economy.

Volatility is high because of the persistent rumors that keep circulating regarding the Euro. New reports overnight suggest that German officials have indicated support for a joint bailout of Greece by the EU and the IMF. The dissension among the EU community is being triggered by the thought that bringing in the IMF will make the European economy appear to be weak.

Additional pressure is being applied to higher risk currencies because of the growing war of words between the U.S. and China regarding currency valuation. China is basically telling the U.S. Treasury to back off from calling the Yuan a manipulated currency.

The USD CAD had a volatile morning after the release of stronger-than-expected inflation data. The surprise increase in inflation spurred speculation that Canadian interest rates may rise sooner than U.S. rates. The Canadian Dollar is rallying on the news while upside momentum is driving this currency closer to parity with the U.S. Dollar.

The USD CHF is trading higher because of the weaker Euro, but gains have been limited by comments from Swiss National Bank Governing Board member Danthine. He said yesterday that the SNB cannot keep borrowing costs near zero for an extended period of time and maintain purchases of foreign currencies indefinitely. This hawkish talk strengthened the Swiss Franc although it is likely to remain weak against the Dollar because of persistent interventions by the SNB to combat its perceived strength versus the Euro.

The British Pound is under pressure. More talk of a possible double-dip recession in the U.K. is pressuring the GBP USD. This report comes two days after the news was released that the Bank of England would back off from extending and expanding its quantitative easing program. Fundamentally, the British Pound is struggling because of the weak economy, political uncertainty and concerns that its credit rating would be cut if it cannot service its debt.

The USD JPY is strengthening ahead of a three-day holiday in Japan. Investors are squaring up positions in the Yen ahead of this holiday. The chart pattern suggests that a break out to the upside in the Dollar/Yen is imminent especially if U.S. equity markets break sharply.

Finally, demand for lower yielding currencies is putting pressure on the Aussie and New Zealand Dollars. The second consecutive inside day in the AUD USD suggests impending volatility. This could trigger a short-term break to .9120 today.

The NZD USD is trading below a major 50% at .7124, suggesting that this market is weakening after spending two days inside a retracement zone at .7124 to .7199. If downside pressure prevails, then look for a near-term break to .7012.