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Dollar Weakens on Profit−taking and High Volatility

James Hyerczyk from ForexHound.com at 01/21/10


The U.S. Dollar is trading mixed at the mid-session as profit-taking and volatility dominate the trade. Earlier in the session, the U.S. Dollar surged as traders took protection against a shift in China’s expansionary monetary policy.

The overnight announcement, that China’s economic growth and inflation figures exceeded expectations fueled speculation that it was poised to begin restricting loans and ending stimulus. Fear that the economy may overheat triggered demand for lower yielding assets at the expense of higher risk assets.

Throughout the New York session, aggressive buyers backed away from chasing the Dollar higher, leading to a profit-taking break. Overbought conditions and intraday turnarounds in the Euro and Yen were the primary causes behind the Dollar’s developing weakness.

The EUR USD weakened further during the New York session, but losses were limited by a rumor which said the European Union was preparing to loan money to the country to shore up its budget deficit. The rumor was denied, but investors, nonetheless, took protection against a possible massive short-covering rally by lightening up positions.

The chart pattern suggests the EUR USD is holding the psychological level of 1.4000; however, 1.3800 remains the next valid downside target. Short-covering today could send this market back to the old bottom at 1.4217.

The GBP USD weakened further overnight on the news that the U.K. budget deficit widened. A lack of confidence in the economy could also be a driving force behind the recent weakness as investors fear that the U.K. may be falling behind its peers in the midst of the economic recovery.

The current two-day break has created two key ranges: 1.5832 to 1.6457 and 1.5895 to 1.6457. These ranges create retracement zones at 1.6144 to 1.6071 and 1.6175 to 1.6108. The overlap of these two retracement zones suggests possible support developing inside 1.6144 to 1.6108. In addition, uptrending Gann angle support is at 1.6132 today. At the mid-session, the GBP USD found support inside this zone at 1.6124.

The USD JPY rose overnight on speculation the Japanese Yen is poised to once again become the world’s carry currency. Additional weakness hit the Yen following a report that demand for lending dropped. The Yen turned higher following a sharp break in U.S. equities. This signaled that traders were buying the Yen for protection.

The USD CHF continued to soar overnight but backed off as it approached the December high at 1.0507. A failure to hold an uptrending Gann angle at 1.0450 triggered profit-taking stops, which led to a short-term collapse and turned the USD CHF lower. A lower close today will form a closing price reversal top and could trigger the start of a sizeable correction.

Technical factors are pressuring the USD CAD now that it has retraced greater than 50% of its recent break. Based on the main range of 1.0745 to 1.0224, the key retracement zone is 1.0484 to 1.0546. This market is currently testing this area. A failure to hold uptrending Gann angle support at 1.0424 will be another sign of weakness. Downtrending Gann angle resistance is at 1.0515. This price was tested early last night when the market rallied to 1.0524.

Fundamentally, the recent action by the Bank of Canada suggests that it will defend against a rapid rise in the currency. This creates a potentially long-term bullish scenario. Short-term conditions are overbought, which may trigger a mild correction.

The AUD USD traded slightly better this morning before falling as traders began to dump higher yielding assets. Currently, this market is finding support at a 50% level at .9031. A failure to hold this level could trigger further weakness to .8961.

The recent actions by China to tighten up its lending policies could have long-term implications on the Australian economy. The formation of a secondary lower top will be a strong sign that a top has been formed. The next Reserve Bank of Australia meeting is February 2nd. Traders are leaning toward another rate hike, but have cut down the probability of the hike now that China has begun tightening.

The NZD USD continued to weaken following a break in U.S. stock markets. Demand for higher risk assets is falling, leading to the liquidation in the Kiwi. Key Fib support at .7150 has been violated which could trigger further weakness to .7075 over the near-term.

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