The U.S. Dollar is trading sharply lower on increased demand for risky currencies following the announcement of an agreement by global banking regulators to increase capital requirements. Traders are celebrating the announcement because it was much softer than banks anticipated and has removed some of the uncertainty that has been lingering in the banking community. Over the week-end, global banking regulators agreed to close to triple the size of capital reserves that banks must hold against losses. The requirement, however, is not expected to kick-in until 2019 which took the pressure off banks to begin increase capital immediately. The new regulation also gives the banks time to raise the new capital requirement through earnings rather than through the shifting of current capital. On Saturday, China posted a report which showed industrial production was stronger-stronger than expected. Chinese retail sales also rose while August inflation of 3.5% was reported at the pre-report estimate. This helped squelch rumors of another round of monetary policy tightening by the Chinese central bank. Last week money left the U.S Treasury and Gold markets indicating that traders were beginning to lean toward an investment in higher yielding assets. This action is partially responsible for the strong rally in equity markets and the higher yielding currencies overnight. The key to sustaining the rally in the higher yielding currencies will be whether U.S. investors chase the equity markets higher from the opening or if they wait for a pull-back. The sharp up move in the equity markets has put stocks in a short-term overbought position rather quickly which may indicate a round of early weakness this morning. The EUR USD is trading sharply higher this morning after piercing a downtrending Gann angle which has been holding the market back since August 6. Upside momentum is strong but has to continue to build in order to reach the next chart objective at 1.2960. The GBP USD is trading higher, but not as strong as the Euro or the higher yielding currencies. The British Pound continues to find resistance on a downtrending angle from the 1.5997 top at 1.5477 today. Continue to look for downside pressure as long as the market remains below this angle. Look for an acceleration to the upside once this angle is penetrated. There has been very little movement in the USD JPY despite last week’s daily closing price reversal bottom which indicates a chance for a breakout to the upside to 84.62. A rally in U.S. equity markets this morning may trigger renewed interest in the carry trade which could be bullish for the Dollar/Yen. Traders are also waiting for some news from the Japanese government and the Bank of Japan regarding an intervention. The uncertainty regarding this matter may be keeping traders on the sidelines. Overall, the theme today is bullish which should help underpin the Australian, New Zealand and Canadian Dollars. Watch for an early session set-back if U.S. equity markets pull-back after the opening.

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