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Asset Allocation Play Drives Stocks Up; Treasuries Down

James Hyerczyk from ForexHound.com at 12/21/09


U.S. equity markets are trading higher at the mid-session as traders bet that the U.S. economy will continue to recover even in the face of higher interest rates.

Investors are reallocating funds from Treasuries into the stock markets. Traders feel that the best return will be in equities in 2010 while higher interest rates will erode the value in T-Bonds and T-Notes.

This morning’s recovery in the U.S. Dollar could be a sign that risk sentiment may not be the driving force behind price action much longer. Investors may begin to use positive economic reports as a reason to buy the Dollar rather than higher yielding assets.

The March Euro is trading weaker at the mid-session. The improving U.S. economy and lingering debt issues in Greece, Portugal and Spain are likely to continue to pressure the Euro. Longer-term charts indicate a move to 1.3800 is likely.

The March British Pound is trading lower. The chart indicates the next potential downside target is 1.5980. Traders are repositioning ahead of tomorrow’s Final Third Quarter GDP report. Economists’ are guessing an upward revision to -0.1% from an earlier guess of -0.3%. This figure will be a positive for the Cable and indicate that the U.K is getting ready to return to growth during the 4th quarter.

The Dollar is trading slightly better against the Yen. Declining demand for lower yielding assets is helping to boost the Dollar. Carry-trade action is also putting pressure on the currency as investors sell Japanese Yen to buy stocks.

The U.S. Dollar turned around versus the Swiss Franc shortly after the New York opening. Traders should pay close attention to the gold market. Weaker gold prices will weaken the Swiss Franc.

The March Canadian Dollar is trading higher. This currency has been rangebound since October. With both economies starting to show signs of improvement, traders will be watching the reports to see which country develops a solid trend or which one has the strongest numbers.

The stronger Dollar is triggering a break in February Gold. The market is once again under 50% support at $1107.40. The next downside objective is $1079.00. Investors are reallocating funds between equities and fixed income investments. This new allocation seems to be leaving gold out of the equation or at least limiting suggested gold allocation levels.

March Crude Oil is trading lower as demand for higher yielding assets is under pressure today. Stronger equity markets are not helping crude oil. This could be because risk sentiment is no longer the driving force behind energy market rallies. The supply/demand picture remains the most bearish influence on this market.

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