USD Basks in Risk-Averse Climate

Market Highlights:

• Overview: March 6, 2012 
• RBA Rate Decision, Euro Zone GDP
• CAD Breaches Parity, Market Bets on More Gains

Overview: March 6, 2012

The USD continues to gain favour this morning, rising against all of its major trading partners save the Japanese yen.  The Aussie, euro, Loonie, and Sterling have all lost from 0.6% to 1% against the Greenback.  Equity markets in Asia and Europe also sold off this morning as concerns over global growth and confirmation of an economic contraction in the euro zone gave little reason to continue holding riskier assets.  Oil is trading lower on the New York market by almost 2% following the 1.4% drop in equity markets in North America.

RBA Rate Decision, Euro Zone GDP

The Asia Pacific session got underway with the Reserve Bank of Australia (RBA) deciding to leave interest rates at 4.25%, supporting a relatively positive view of global growth prospects. 

However, traders focused solely on the RBA’s apparent appetite for a future cut in interest rates and sold the Australian dollar heavily.  The AUD breached the 1.0600 level against the USD, and has already reached a five-week low this morning, with more downside likely to follow.

As Asian currencies and equity markets posted losses, traders awaited the release of revised fourth-quarter 2011 GDP numbers for the euro zone, hoping to get further confirmation on recent doubts about future global growth.  The GDP release was quite weak, posting a contraction of 0.3% from the third quarter, which was effectively in line with expectations. 

Garnering the most attention among market participants was the 1.2% drop in imports to the euro zone, which only lends further support to those doubting the strength of the global economy and particularly the recent appreciation in global equity markets and industrial commodity prices. 

As expected, traders sold the common currency against most of its major trading partners and pushed it into decidedly bearish territory (further weakness) against the USD as it put in fresh two-week lows around the 1.3120 area.

CAD Breaches Parity, Market Bets on More Gains

The Canadian dollar has traded back above parity against its US counterpart this morning and looks to be taking cues from overall global sentiment rather than any specific news release.  Despite this morning’s move, speculative traders have increased their CAD-long positions (betting on future strength) in the past few weeks, such that the market is now net-long the CAD at levels not seen in many months.

This comes on the back of a significant period of appreciation for the Loonie starting in November 2011.  USDCAD has also formed some potentially powerful technical signals on its weekly chart that could point to further gains for the Loonie.  The first major target would be the lows of September 2011 around the 0.9725 area. 

However, with so much headline risk out of Europe and jobs data coming later in the week from both the US and Canada, there remains a risk of significant short-term spikes in risk aversion that could see the USD gain considerable favour. 

Note that the recent rally in equities and industrial commodity prices, which has supported the CAD, was characterized by very low trading volumes and aggressive measures from the world’s largest central banks to provide cheap money to struggling institutions and governments.  A rise in aggregate demand for goods and services was not the main driver, and as such the market is still showing signs of indecision that could lead to brief periods of accelerated price movement across currency pairs, providing many opportunities for the commercial trader.