The U.S. Dollar is under pressure overnight as traders are liquidating long positions on the prospect of that a deal to rescue Greece from its sovereign debt problem is being worked out in Brussels. Speculation is rising that some kind of "bailout" package is being created which would help shore up the Greek budget and help restore confidence in the Euro Region.
In a scene out of the movie "Wall Street", the travel habits of ECB President Trichet are being tracked as if they are an indication of an impending deal. It has been reported that Trichet cut back a trip to Australia to attend a European Union meeting in Brussels. The market is reading this as a sign that negotiations have reached a critical point and that an announcement of a plan to back Greece and perhaps other struggling nations is ready to be revealed.
Appetite for risk is being renewed as investors are gaining more confidence that Greece's fiscal problems will be resolved and the threat to the global economic recovery will be diminished. Both commodities and stocks are on the rise, taking with them commodity-linked currencies such as the Canadian and Australian Dollars.
Volatility is expected to increase as long Dollar traders begin to exit positions. At the same time, investors will continue to be cautious and may overreact to any news that indicates the impending deal has hit a snag.
The EUR USD is trading sharply higher on the possibility that the Greek fiscal problems will be resolved in an orderly fashion. Investors are covering short positions aggressively in an effort to lock-up recent profits. In addition, new long positions are being entered as bullish traders anticipate the possibility the Euro will return to a more reasonable price level.
The GBP USD is mounting a strong recovery after trading lower for several days. The gains in the Pound are most likely a relief rally, triggered by short-covering. Investors are still skeptical about the U.K. economy as well as sovereign debt issues of its own.
The USD JPY is trading higher as demand for risky assets returns to the market. Traders are lightening up safe haven positions in the Japanese Yen. Volatility is likely to be high once the announcement of the plan to shore up Greece's finances is released.
The rally in the Euro is taking the pressure off the Swiss National Bank to intervene. This is helping the USD CHF weaken. The SNB will do anything to defend its currency against deflation and this includes applying intervention when necessary. As long as the Euro appreciates versus the Swiss Franc, the SNB will avoid using intervention as its main tool to maintain stability and order to this currency relationship.
The return of demand for risky assets is helping to boost equities, gold and crude oil. This is leading investors to step up demand for the Canadian Dollar while exerting pressure on the USD CAD.
Appetite for risky assets is also driving up demand for the higher yielding AUD USD and NZD USD. These two pairs have taken a beating lately as traders dumped asset-related currencies. A return to more "normal" risk conditions is likely to benefit both markets. Technically, both of these markets posted closing price reversal bottoms on Friday. These potentially bullish patterns were confirmed overnight. The current patterns suggest a 2 to 3 day rally appears imminent.
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