U.S. equity markets finished higher after treading water most of the day in sideways-to-lower trading action. Traders seemed to be waiting for a catalyst all day. Near the close equity markets mounted a strong surge to finish on their highs.

Thursday night, news that China’s inflation rate was higher than expected, fueled speculation of a rate hike which helped drive down demand for higher yielding assets. The lack of follow-though to the downside, however triggered a short-covering rally which helped to boost equity prices from their early morning lows. The March E-mini S&P 500 broke through the January top at 1148.00. This action kept this market on pace to reach the March 12th objective of 1156.00.

June Treasury Bonds recovered from earlier losses to close better. Earlier traders sold Treasuries in anticipation of a possible rate hike by China. The inability to break -through yesterday’s low at 115’27 triggered a short-covering rally near the mid-session. Technically, this market picked up strength after regaining a 50% line at 116’04. This price will dictate the direction of the market over the short-run. Holding above it means the market is discounting the Chinese news. Falling below it will indicate a further drop to 115’06. If the rally continues, then look for a retracement to 116’30 to 117’06.

The weaker Dollar triggered a short-covering rally in April Gold. Technically this market posted a minor closing price reversal bottom. Oversold conditions also contributed to the turnaround. A follow-through rally on Friday could trigger a retracement to $1123.10.

June Crude Oil finished unchanged after trading slightly weaker throughout the day. A decline in demand for higher risk assets was behind today’s early weakness as well as overbought conditions. Technically, this market is beginning to weaken. Trend lines are being penetrated and momentum is slowing. The charts indicate there is room to the downside, but the weaker Dollar and firm Euro helped to limit losses. Another surge in equity markets could trigger a retest of the recent high at 83.77.

The U.S. Dollar declined into the close after trading in a tight range most of the day. A strong surge in the equity markets late in the session confirmed investor demand for risky assets, thereby pressuring the lower yielding Dollar.

At times on Thursday, traders were demanding lower yielding currencies in response to an overnight report that showed China’s consumer-price index spiked higher in February. Investors speculated that its central bank would have to raise interest rates to curb economic growth. The inflation report showed an acceleration from the year-earlier month, to a greater-than-expected pace of 2.7%. The higher growth was tied to greater-than-expected gains in fixed-asset investment, bank lending, and industrial production.

The Dollar extended its earlier gains after economic reports showed the trade deficit unexpectedly shrank and weekly initial claims for jobless benefits fell. These gains were short-lived however, as investor demand for higher-yielding assets picked up late in the trading session.

The March Japanese Yen finished unchanged after a choppy, two-sided trading session. Earlier in the day, it rallied on speculation that China may have to hike interest rates to curb economic growth but then broke when U.S. equity markets weakened. Finally at the end of the day, the Dollar was able to mount a comeback against the Japanese Yen as the stock market soared into the close.

The March Canadian Dollar rallied hard after early session weakness to finish higher. The early session weakness was triggered when this market failed to attract buyers after reaching its highest level since October 2009. Overbought conditions and less demand for higher risk assets also helped to contribute to the early weakness. The strong rally late in the trading session drove up demand for higher risk assets, thereby underpinning the Canadian Dollar into the close.

The bigger picture still suggests that the stronger currency is the Canadian Dollar. Higher oil prices and the prospect of rising Canadian interest rates have helped increase the view that the Canadian Dollar could test parity. Investors are beginning to believe that the Bank of Canada is likely to hike interest rates before the Fed.

The March Euro closed higher in light trading. Today’s action put this market in a position to challenge the recent top at 1.3735 while in the process, forming a new main bottom at 1.3528. Technically, this currency is trading in a range. A support base is being built which suggests an impending rally, but this market needs a catalyst to drive it through the recent top. The easing of fiscal tensions in Greece is contributing the most to the developing bullish tone. Traders seem to be waiting for some event to shake up the record number of shorts in the market in order to trigger a short-covering rally.

The Swiss National Bank voted on Thursday to leave interest rates at historically low levels while reiterating its stance to intervene decisively if necessary to protect the currency. It also raised its outlook for 2010 inflation from 0.50% to 0.70%. The rally in the Euro helped strengthen the March Swiss Franc. Accelerating upside pressure could trigger a further rally into a major 50% level at .9526.

The March British Pound closed higher after a Bank of England report predicted that inflation would be 2.5% this time next year. This projected increase was slightly better than the November guess of 2.4%. The fact that this market was able to hold onto most of its overnight gains could be a sign that the recent selling pressure has dried up. This could mean a short-covering rally is imminent. Gains could be limited however because aggressive shorts still feel that there is much more potential to the downside because of the weak economy, political uncertainty and the BoE’s dovish tone.