Hurricanes, Elections and Interest Rates
EUR/CAD
CAD Rate Gap May Be Trimmed:
The recently downgraded category 3 Hurricane Rita is expected to make
landfall late Friday, early Saturday and the market and world are holding their
breath in anticipation of damages. Not only will Canada benefit from any
appreciation to commodities that represent a high percentage or their exports,
but this could also mean Canadian interest rates could catch up to the U.S. The
BoC can continue to tighten monetary policy as their economy chugs along. On the
other hand, the optimistic Fed may have to stall their rate hikes if Rita does
significant damage and causes another dent to GDP. The USD and CAD are the most
likely suspects for continued rising rates, bolstering both currencies.
Uncertainty in Germany:
The uncertainty in Germany sent the euro even lower today, as
Chancellor Schröder and contender Merkel failed to make progress in a meeting to
hash out how to pass necessary policies. Another meeting is scheduled next
Wednesday and rejected coalition talks with Merkel by the Greens could tip the
balance. As the political turmoil in Germany worsens, the euro will likely
continue to be soft.
Technically Speaking:
Loonie bullishness was strong enough to break through a 61.8% two
year fib level at 1.4185 that has produced fresh three-year lows for the pair.
Little stands in the way from stopping spot from its march lower. However, if
the oversold reading from the slow stochs prove true and a retracement is due,
expect the pair to test the former support level at around 1.1465. Looking
lower, the psychologically inclined 1.4000-level will offer some euro bids to
take some of the wind from a continued run down.
USD/CHF
Banking on the Interest Rate
Differential:
Traders bet that higher US interest rates would favor the US dollar
and used the Franc as a funding currency, especially following an SNB statement
that officials will not allow their currency to appreciate too quickly. A move
above 1.2830 broke through a reported $1 billion in limits and showed the
strength of today’s buying.
Dollar Boosted by China Statement:
The dollar was the big winner on currency markets today, as the
Chinese government rushed to announce wider trading bands for all currencies
except the dollar. Speculation that lower inventories of non-dollar currencies
would be a direct result of this move set the dollar higher against all major
currencies.
Technically Speaking:
The dollar strength that led the pair on a 150-pip run for the
session hasn’t seemed to run out of steam. The pair stayed strongly bullish even
as volatility dried up going into the close for the week. Barring an unexpected
event or massive damage from Rita that could cut dollar strength short, expect
the pair to continue its run to 1.3075 where range support for most of July is
hovering. If the dollar hits a snag over the weekend, the 76.3% fib at 1.2886
will be the first testing point.
EUR/USD
Hurricane Rita Saves the Dollar:
With investors cautious following the underestimate of Hurricane
Katrina damage, good news from the Gulf of a weakening Hurricane Rita sent oil
prices lower and lifted the dollar at the expense of other currencies. Investors
were preparing for a Katrina-style destruction of America’s energy
infrastructure and communities. It seems likely that this storm will not cause
nearly as much damage, removing some uncertainty from the market.
No Rate Hike is Seen in the Near-Term:
Rumors from an ECB source that no rate hike is expected in the
near-term unless a second blow from oil prices surface weighed on the dollar.
With the interest rate differential now sitting at 175 basis points with no
stopping in sight for the federal funds rate, the dollar continues to look
increasingly attractive.
Technically Speaking:
The daily bar for the EURUSD ended the week at 1.2040 in a shaved
bottom that happens to correspond to the 76.3% fib that runs from early July to
the beginning of September. As long as there is no rush in dollar bids following
an unexpected event, the euro could find its way back into positive territory
and come under pressure at the 23.6% fib of the last run at 1.2168. If the
dollar proves to be too strong, the well-tested, psychologically significant
1.2000-level will be suspect for support.
Richard Lee
Richard Lee is a Currency Analyst at Forex
Capital Markets. Employing both fundamental models and technical analysis
applications, Richard contributes regularly to DailyFX, Yahoo Finance and Comtex.
Prior to joining the research team, Richard was one of the senior instructors
for the FX Power Course, teaching thousands of traders the basics of currency
trading, technical analysis and how to implement trading strategies. He has
extensive experience in trading the spot currency markets, options and futures.
Richard previously traded FX, equity and equity derivatives for four years as
well as work for a private equity consortium before joining FXCM.