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Investors Seek Safety in U.S. Dollar after Weak Housing Report

James Hyerczyk from ForexHound.com at 10/28/09


The U.S. Dollar is trading higher at the mid-session as weak U.S. housing data is encouraging investors to dump higher yielding assets and seek safety in the Greenback.

This morning, stock market losses are clearly triggering the rapid return to the Dollar as a safe-haven investment. Losses in commodity markets especially crude oil are also contributing to the Dollar’s strength.

The EUR USD is weakening on liquidation of higher yielding currencies. Based on the main range of 1.4480 to 1.5063, today’s weakness hit a key retracement zone at 1.4762 to 1.4696. Investors should watch for a possible technical bounce from this area.

The GBP USD is showing some resiliency at the mid-session and showing a small gain. This move could be a stronger British Pound rather than a weaker U.S. Dollar. Recently the British Pound was hammered as traders punished the currency because of the expansion of its quantitative easing program. Today’s strength most likely represents the unwinding of spreads against the British Pound by the weaker currencies.

Japanese investors are betting that traders will continue to dump higher yielding assets and seek the safety of lower yielding currencies. In this case, the Yen is being favored over the U.S. Dollar as traders begin to discount the possibility that U.S. rates will soon be back above Japanese rates. The chart indicates the potential for a break back to 90.15 to 89.64.

Weaker equity and crude oil prices are weighing heavily on the Canadian Dollar. The current rally was initially started when the Canadian government sternly expressed displeasure against the rapid rise in their currency. This news turned the USD CAD up. Watch for profit-taking or a technical bounce down now that the USD CAD has reached Gann angle resistance at 1.0771.

A drop in demand for higher yielding assets along with a report showing that Australian inflation was lower than expected was just enough to convince investors that the Reserve Bank of Australia was not going to hike interest rates by 50 basis points at its next meeting. This is triggering a massive liquidation by speculators who had driven up the Aussie in anticipation of an aggressive rate hike. Some traders are no speculating that there will be no rate cut next month. The majority still feel that a 25 basis point cut is in order.

Traders initially sold the NZD USD in sympathy with the break in the Australian Dollar, but are now selling more aggressively on the notion that the Reserve Bank of New Zealand will not surprise with a 25 basis point rate hike tomorrow.

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