Forex Trading - Market Update

RISK ON
After Moodys refused to downgrade Spain's credit rating to junk yesterday, risk appetite has steadily increased across the board. The WSJ dollar index was down 0.50% at one point, and the commodity currencies (AUD, NZD, CAD) were the strong performers. The Euro and Pound rose against the dollar, but retraced some of yesterday's gains against the commodity currencies. GBP/AUD dropped 100 pips and EUR/AUD dropped 50 pips respectively.


USD/CAD
The Canadian Dollar, otherwise known as the Loonie, gained a lot of strength stemming from the better than expected data prints on US Building Permits and Housing Starts. Why? Canada does the majority of its exporting and importing with the US. In particular, Canada exports a lot of raw materials to the US that are used in industrial and manufacturing production. Thus, when there is an increase in expected production which requires a lot of the raw materials that Canada exports, the Loonie appreciates. This is a substantial turnaround from yesterday when "less-hawkish" comments that Bank of Canada's Carney made (on Monday) caught up with the Loonie and caused it to depreciate.

AUD/USD
This currency pair ripped up 180 pips without a retracement since bouncing off the 1.0200 level. It previously got as low as 1.0150, conveniently knocking out stops below the recent swing low. The three main commodity currencies have been strong today, but the Aussie seems unusually well bid. The only reason I can find for the strength is that many market participants are expecting the Chinese GDP number to come in at or better then expectations. (Previous 7.6%, Expected 7.4%). I think this may be a "buy the rumor sell the fact" scenario. I think we'll need to see a really good number (7.8% or higher) for this current rally in the Aussie to be sustained. If the GDP numbers comes in at or below expectations, the Aussie could fall.

EUR/USD
I've been saying for a while that when it comes to trading the Euro, it's the perception of stability that matters in the short term. The fundamentals continue to deteriorate, while the Euro continues to gain against most other currencies. Spanish, Italian, and Greek bond yields are all now significantly lower from their peaks. I don't see how European equity prices and the Euro can remain at these levels without political leaders fixing at least some of the economic and political problems; but I don't see the point in shorting until we see weakness. There's nothing I find more annoying than having a completely "irrational" move run up in my face. Better to wait for weakness and then pounce.