U.S. stock indices are trading better this morning ahead of the U.S. session. Although they are off their highs, there seems to be enough demand for higher risk despite the strengthening Dollar and the falling Euro and British Pound. This could mean that traders are confident that the EU and Greece are close to reaching an agreement regarding the budget deficit crisis or it may be a vote of confidence in the U.S. economy. Traders may turn against risk if the Euro continues to weaken.
Today’s U.S. economic reports may have some say in the matter. Personal income is expected to show no growth while consumer spending is predicted to show a modest gain. The ISM Manufacturing Index has been up for 6 straight months, but his month is called flat. The predicted range is 55 to 60. Finally, Construction Spending is called lower. The drop in home sales should have a negative influence on construction spending. Early guesses for Friday’s Non-Farm Payrolls Report is for a loss of 50,000 jobs.
June Treasury futures are trading lower. Traders don’t seem to be too concerned about risk in the pre-market trade. Look for strong economic reports to send the June Treasury Bonds and June Treasury Notes lower. A plunge in the equity markets is also likely to support the Treasuries.
The stronger Dollar is pressuring both April Gold and June Crude Oil. Look for this trend to continue if the Euro and British Pound continue to drop sharply.
The U.S. Dollar is expected to open higher this morning based on its strong overnight performance. Risk sentiment appears to be waning following early session strength. Commodity and equity linked currencies have reversed course after trading higher most of the overnight session.
The weakest currency is the British Pound. Overnight the March British Pound began to accelerate to the downside after running stops under 1.50. Traders tried to establish support at a major .618 level at 1.4854 but this also failed, sending the market to 1.4780. The new resistance is the 50% level at 1.5271.
Politics added to the negative sentiment hurting the British Pound this morning. Recent polls are indicating that the U.K. may have its first minority government since 1974. Investors believe that this could hurt the country’s efforts to cut its deficit. Also driving the Cable lower are reports that the EU is close to a resolution of the Greek budget issue. This helped trigger the early break in the British Pound when the Euro strengthened suddenly.
The Wall Street Journal reported over the week-end that Germany and France have a plan to bailout Greece with as much as 30 billion Euros ($41 billion). This came on the heels of a late session report on Friday by Bloomberg News which cited an anonymous source claiming that the German state-owned bank KfW Group may buy up to 25 billion Euros in Greek bonds as a precaution against other support means drying up.
Both stories indicate that a solution to the Greek budget deficit crisis is near. This is helping to keep the March Euro inside a tight range of 1.3692 to 1.3443. A breakout over the high end of the range will turn the main trend to up. Breaking through the lower end of the range will reaffirm the downtrend and could lead to an acceleration to the downside.
The recent weakness in the Euro seems to be making the European Union nervous. In a statement released overnight, EU Monetary Affairs Commissioner Rehn urged Greece to announce more measures to shore up its budget soon. He also added that the EU was “sure we will overcome” the Greek fiscal challenge.
Stronger U.S. equity markets are a sign that investors may be holding on to the slight chance that risk sentiment will remain strong throughout the trading day. This may be the reason why the March Japanese Yen is trading lower this morning. Should equity markets turn down then look for the Japanese Yen to strengthen.
The weaker Euro is helping to pressure the March Swiss Franc. Once again, traders are taking a defensive stance against the Swiss Franc in anticipation of a possible intervention by the Swiss National Bank. The trend turned up last week when the Swiss Franc broke through a swing top at .9334. Although there was little follow-through to the upside, the trend will remain up unless the last main bottom at .9193 is violated. This is unlikely unless the Euro makes a new move low.
Weaker Gold and Crude Oil are helping to pressure the March Canadian Dollar. Traders are also expecting the Bank of Canada to leave interest rates unchanged at tomorrow’s meeting. There was early chatter that the improving economy may lead the BoC to drop a few hints that interest rates would rise shortly after June. Like the U.S., the Canadian economy is improving, but low employment continues to remain a key issue.
