Euro Break accelerates to Downside as Shorts Pile On

The U.S. Dollar Index rose to a new high for the year as demand for the Greenback soared following an escalation of the fiscal problems gripping the Euro Region economy.

The U.S. Dollar Index rose to a new high for the year as demand for the Greenback soared following an escalation of the fiscal problems gripping the Euro Region economy.

Wednesday’s session began with the Euro breaking through its recent low at 1.3440, triggering a sharp plunge after Fitch downgraded Portugal’s credit rating. Coupled with on-going concerns regarding efforts by Greece to obtain financial aid from either the European Union or International Monetary Fund, this latest development weakened the Euro throughout the day as the EU began its two day summit to discuss various bailout proposals.

Tuesday night Fitch announced it had downgraded Portugal one level to AA- and warned further cuts would be forthcoming unless the country takes care of its ailing finances. Although this downgrade had been in the market for weeks, Euro investors nonetheless applied downside pressure on the thought that the other credit rating agencies, the S&P Corp. and Moody’s, would reaffirm Fitch’s assessment. Furthermore, traders reacted as if this situation would spread to other sovereign nations as the European Union continued to drag its feet amidst the already dire Greek outlook.

After closing the previous day off its low following the news that France and Germany were leaning toward accepting a Greece financial aid package from the IMF, the Euro weakened shortly before the Fitch news on the notion that financial aid from an outside entity would appear to be a weak signal from the European Union. This was almost a complete about face from the scenario earlier in the week which helped push up demand for higher yielding assets and currencies.

According to the recent CFTC’s Commitment of Traders data, short traders continue to control the direction of the Euro. Although efforts have begun to curb excessive short speculation in the European single currency, it looks as if bearish speculators are in control and have called the direction of this currency precisely. Even if a financial aid agreement is reached, it seems that the shorts will be reluctant to budge until there is clear evidence that Greece and the other nations experiencing financial difficulties are well on their way to solidifying their economies.

The Dollar rose across the broad against all major currencies as investors sought protection from the drop in demand for higher yielding assets. Fear spread throughout the markets today as support for the Euro continued to erode. Investors showed their support for the Dollar by selling off equities, gold and crude oil.

The GBP USD finished lower with downside momentum slowing building throughout the trading session. Although Euro Zone issues were the catalyst on Wednesday, traders realize that support for the British Pound is fragile and that the U.K. could face a similar downgrade and warning from the credit rating agencies. The British Pound also remains vulnerable to the downside because of the weakening economy and the threat of a ‘hung Parliament” based on poll survey results ahead of the upcoming election.

Overnight, the USD CHF reached a 50% level at 1.0703. This completed a retracement of the recent break from 1.0897 to 1.0506. Intraday upside momentum continued throughout the day as this market neared the .618 retracement level at 1.0749. Talk circulated that the Swiss National Bank was actively intervening to prevent its currency from rising relative to the Euro. Rumors are circulating that the recent spate of intervention activity is raising concerns that the SNB will soon be listed as a currency manipulator by the U.S. Treasury Department.

Expectations for impending volatility proved to be true for the USD JPY as this market broke out to the upside through a long-term downtrending Gann angle at 90.40. In addition, buying pressure helped this market regain a key 50% level at 90.95 and change the trend to up on the daily chart on a trade through the last swing top at 91.08. Upside momentum accelerated throughout the day as buyers chewed through many layers of resistance before finally penetrating the February 19th top at 92.14.

The USD CAD closed higher after regaining an old bottom at 1.0205. The current chart formation suggests impending volatility with a bias to the upside. After confirming a closing price reversal bottom at 1.0060 earlier in the week, this market appears to be building upside momentum which could send this market soaring to a major 50% level at 1.0369. The catalyst behind Wednesday’s short-covering rally was weak gold and crude oil markets.

The AUD USD finished lower after it began to accelerate to the downside close to the mid-session. The current chart pattern suggests that this market has room to break to the downside with .8914 a potential target over the near-term. A plunge in U.S. equity markets in reaction to the weakness in the Euro could send investors scurrying out of higher yielding currencies.

A similar situation to the one developing in the Aussie Dollar is taking place in the NZD USD. Traders seem to be shying away from aggressively shorting this market and in front of a minor retracement zone at .6992 and .6948. A shift in risk sentiment back toward risk aversion could pressure the New Zealand Dollar. Bearish traders may try to probe the downside on Thursday in an effort to trigger stops.