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Robust U.S. GDP Report Renews Interest in Higher Yielding Currencies

James Hyerczyk from ForexHound.com at 10/29/09


A better than expected U.S. Third Quarter GDP Report is sending the Dollar sharply lower at the mid-session. The Dollar was trading weaker prior to the release of the report as many traders thought this week’s rally was too much, too soon. The Dollar plunged to the downside after the report showed a robust increase of 3.5% compared to pre-report guesses of 3.2%.

Traders are expressing their satisfaction with the report by renewing their interest in higher yielding assets. This is putting pressure on the Dollar while increasing demand for equities and commodities. Despite the bullish trend today, many markets are only posting 50% retracements of the break this week which means they are still vulnerable to weakness after today’s euphoria wears off.

Although the GDP number was bullish, it represents stale data. Some traders feel that the bullish markets have to close on their highs and follow-through to the upside tomorrow. Otherwise, the Dollar may regain control of the short-term trend and erase all of today’s gains by tomorrow’s close.

The EUR USD is in an uptrend and rallying strong today. Expectations are for a test of 1.4873 to 1.4918 before new sellers surface.

The GBP USD is showing strength for the second day in a row. This is surprising traders who felt more downside was likely following last week’s release of a bearish U.K. GDP number. Many traders had been looking for lower markets in anticipation of increased quantitative easing by the Bank of England. The strong rally today has taken out a minor retracement zone and now has this market in a position to test the recent top at 1.6691.

The Dollar is gaining ground against the Japanese Yen at the mid-session. The bullish GDP number helped turnaround the USD JPY which came close to turning the trend down after yesterday’s huge sell-off. Look for the USD JPY to take a run at 91.28 to 91.53 over the short-run.

The USD CHF is retracing most of this week’s gains. Based on the range of 1.0032 to 1.0285, traders should look for the current break to test a retracement zone at 1.0158 to 1.0129. Since the main trend on the daily chart is now up, buyers are likely to step in at this retracement zone. If buyers don’t show up, then look for a retest of the low for the year at 1.0032.

Stronger commodity and equity prices are helping to put pressure on the USD CAD. Overbought indicators are also contributing to the weakness as well as increased demand for higher risk assets. If weakness prevails the rest of the day, then look for a test of an uptrending Gann angle at 1.0605.

News that the Reserve Bank of New Zealand left interest rates unchanged and hinted that they wouldn’t hike until after the middle of next year has been set aside by traders as the focus has shifted back to demand for higher yielding assets. Today’s rally looks strong enough to test a resistance cluster at .7395 to .7398.

The AUD USD is moving higher on increased demand for higher yielding assets. In addition, many traders are taking profits and covering shorts as technical indicators showed a short-term overbought market.

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