Euro Finishes Down but Off Low; Bond Auction Indicates Rates May Remain Low

The Euro finished down but off its session low when traders lightened up positions following dovish comments from Fed Chairman Bernanke and a better than expected 10-Year Note auction.

The Euro finished down but off its session low when traders lightened up positions following dovish comments from Fed Chairman Bernanke and a better than expected 10-Year Note auction.

Bernanke said that economic conditions are continuing to improve but there are still concerns about weak bank lending and a sluggish housing market. His comments caused traders to soften their positions in the Dollar which had been placed in anticipation of an interest rate hike by the Fed. While Bernanke maintained his dovish stand, Kansas City Fed President Hoenig warned that low interest rates are helping to form asset bubbles. He suggested that the Fed raise its benchmark interest rate “sometime soon”.

Treasury markets rallied as yields fell following today’s 10-Year Auction. Traders bought a record amount of 10-Year debt. Demand was strong which helped put pressure on yields. Some traders claim it was flight to safety because of concerns over a Greek default which triggered the demand in the Treasuries on Wednesday. Others believe the Fed will continue to keep interest rates low until the economy reaches a sustainable level. For whatever reason, yields remained low and traders now believe the Fed will leave interest rates untouched for a while. This encouraged some bullish Dollar traders to lighten up their positions.

The EUR USD traded weaker on renewed concerns that Greece will default on its debt. Earlier today the spread between Greek Bonds and German Bunds moved to a historically wide level signaling that investors felt that Greece may not be able to finance its surging debt burden. Conditions are expected to worsen as austere financial measures imposed by Greece to shore up its economy begin to take hold. Losses were limited by rumors of central bank buying and lower Treasury yields.

The GBP USD recovered from earlier selling pressure triggered by a weaker than expected U.K. services industry reports. Despite the strong intraday comeback, gains were limited by the key 50% technical level at 1.5297. Look for downside pressure as long as this price holds as resistance.

Lower equity prices helped to pressure the USD JPY. Technically, this market has been under pressure since Monday’s closing price reversal top. The chart pattern suggests a minimum 2 to 3 day break with a possibility of a near-term decline to a 50% level at 92.26. A drop in Treasury yields also contributed to the last session sell-off.

The USD CHF closed higher because of the weaker Euro. Traders expect more intervention by the Swiss National Bank over the near-term if the Euro continues to plunge. As mandated in its recent policy statement, the SNB is poised to continue to defend its currency and economy through interventions and open market operations. Technically this pair is in a position to change the trend to up on a breakout over the last swing top at 1.0751.

Talk of a large U.S. investment bank purchase helped to boost the USD CAD after this pair tested the waters below parity earlier in the session. Oversold conditions and a closing price reversal bottom could encourage short-covering on Thursday. The strong surge in gold appeared to have been neutralized by the weakness in crude oil, thereby having little effect on the Canadian Dollar today. Gold may not be such a good indicator of strength in the Canadian Dollar at this time because it appears to be decoupling from the U.S. Dollar. The daily chart indicates the potential for a 2 to 3 day rally with 1.0138 the next upside target.

Higher gold prices and an early recovery in U.S. equity markets helped drive up the AUD USD, but the late session sell-off in stocks helped form a daily closing price reversal top. The current formation suggests the start of a minimum 2 to 3 day break with .9149 the next downside target. The trend is this market is decisively higher, leading to speculation that this rally will not stop until the high for the year at .9329 is tested over the near-term. Today’s reversal top suggests position paring rather than a change in trend.

The NZD USD finished better following a slight follow-through to the upside following Tuesday’s minor reversal bottom. Higher gold prices helped to underpin this market. Technically, this currency pair turned the main trend down on the daily chart on Tuesday. The current rally could be short-covering, but some traders feel that the possibility of an interest rate hike in June is lending some support.