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 Shröder 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 hasnt 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 is a Currency Strategist at FXCM.