U.S. Dollar Mixed; Greek Woes Continue to Weigh on Euro

The U.S. Dollar is trading mixed overnight. Weakening equitymarkets are contributing to a renewed drive into lower yielding currencies.

The U.S. Dollar is trading mixed overnight. Weakening equitymarkets are contributing to a renewed drive into lower yielding currencies.

The EUR USD continues to get pounded. Overnight the Greek 10-yearBond/German Bund Spread hit a new 12-month high at 492 basis points. Investorsare asking for protection from a potential collapse in the Greek debt market. Greece is alsobeginning to implement some of its newly proposed austere financial measures designedto tighten up debt and improve its cash flow. Facing a huge rise in the cost toservice its debt, Greeceis scheduled to meet with certain European Union officials and theInternational Monetary Fund to discuss the terms of the recent bailout proposal.

Talk is circulating that the recent bailout plan isunderfunded. Hedge funds continue to short the Euro in anticipation of moreborrowing by Greeceand another proposal from the EU/IMF to provide additional emergency funds ifnecessary.

The GBP USD is trading steady to better overnight whilehugging a .618 retracement line at 1.5419. Overnight the Bank of Englandminutes were released. The minutes revealed that the BoE members voted 9-0 tokeep interest rates at historically low levels, but that inflation was aconcern. On Tuesday a report was released showing U.K. CPI had risen to 3.4%.This percentage was almost twice the target of 2.0%. After providing stimulus for months in aneffort to revive the economy, the BoE will now have to figure out how to beginremoving the stimulus to lower inflation without upsetting the developingrecovery.

The upcoming May 6th election is also a concern for U.K. investorsat this time which is helping to limit gains. Traders maintain that theelection is too close to call and that there is still a strong possibility of ahung parliament. This could mean that without a majority in the parliament, aplan to slash the U.K.budget deficit may not be able to be implemented.

The weaker Euro is helping to boost the USD CHF.Technically, this market seems poised to breakout to the upside. Traders areselling the Swiss Franc in anticipation of further intervention by the SwissNational Bank. The SNB is mandated toprotect its economy and its export market by purposely weakening its currencywhen it advances substantially against another. In this case, the falling Eurogives the appearance of a rising Swiss Franc. This means that withoutintervention, Swiss exports may suffer because traders will seek cheaper goodsin the Euro Zone.

The USD JPY rallied overnight into a 50% retracement levelat 93.18. The test of this level is producing a technical bounce to thedownside. Fundamentally, a small break in global equity markets overnight isencouraging traders to buy lower yielding, lower risk assets. This currencypair could get volatile depending on how the U.S. equity markets trade.

The USD CAD is still under pressure following Tuesday’sannouncement by the Bank of Canada that it is going to begin hiking interestrates sooner than expected. The Canadian Dollar rose to a new 22-month highovernight. Traders feel this currency will continue to rise as long as the U.S. keepsinterest rates low and because of the improving Canadian economy. The BoC wantsto act as early as June 1st in order to stem the harmful effects of inflation.Aside from a few short-covering rallies triggered by the dumping of higher riskassets, look for traders to continue to press the Dollar/CAD lower.

On Tuesday, the AUD USD resumed its quest to reach parityafter the Reserve Bank of Australiaminutes indicated that policymakers are concerned about inflation heating up.This was a strong indication that the RBA will raise interest rates for the 6thtime in 7 months at its next meeting in May. The pick-up in demand for higheryielding assets also contributed to the rise in the Aussie. Technically, thismarket could be forming another lower top which could mean a resumption of theshort-term downtrend. The April 12th top at .9387 was formed following a reportthat mortgage applications had dropped. This could mean that housing will bedown in the near future. The conflictbetween the possibility of a drop in housing and inflation could create asideways to lower trade. One indicator is looking at the future while the otheris looking at stale data. This may encourage traders to hold the market steadyuntil more information becomes available.

The NZD USD is down slightly overnight. This marketcontinues to hold steady as traders await more information about a potentialinterest rate hike by the Reserve Bank of New Zealand. Some traders feel thatsince Australia has beenraising rates and that Canadais likely in June that the RBA is feeling pressure to follow suit. Technicallya close over .7124 will be a sign of strength. Look for an acceleration to theupside following a breakout over .7199.