Eight days and counting till the US debt ceiling needs to be adjusted upwards. That is if we are using the original August 2nd deadline and not the new August 10th revised deadline suggested by the US treasury due to unexpected tax receipts. Either way, the US political wrangling and heavy-handed rhetoric is spilling out, generating a high level of uncertainty across markets and eroding the USD’s position. The assault on the USD continues today as President Obama and Boehner’s televised address suggested that the two parties were nowhere near a “grand bargain.”
Trading volume remains light across FX as trading patterns show no specific direction as markets wait for a resolution on the ongoing US debt negotiations. As Obama spoke, the EURUSD aggressively rallied to 1.4522 from 1.4358 while USDCHF fell to new all time lows at 0.7997. While the USD’s weakness trend is becoming entrenched so far it seems as if the markets are expected a credit downgrade and not a selective default. A full fledged US default would put the USD significantly lower across the board.
President Obama stated that a “default would risk causing a deep economic crisis.” Republican speaker Boehner accused the democrats of demanding a “blank check.” Obama also noted that a 6-month debt cap extension won’t solve the problem and threatened to veto any temporary debt limit proposal. Boehner responded by saying “the sad truth is that the president wanted a blank check six months ago, and he wants a blank check today. This is just not going to happen.”
The choppy trading seen across FX with the USDJPY jumping from 78.00 to 78.75 then retracing down to 77.90 for no good reason. We suspect that eventually there will be an 11th hour solution, but given the heated level of discourse and divergence between parties, it going to get a lot nosier before the announced proposal. Make no mistake, this debt ceiling has become a tool for politicians and represents a strategic instrument for which republican see themselves gaining the White House next year (hence the demand for a short term solution). Watch for the USD and US’s reputation to suffer.
In Australia, the RBA Stevens’ speech was relatively optimistic on the economy which supported the AUDUSD’s rally to 1.0941 from 1.0821 (pushing through the 1.0880 resistance). Governor Stevens noted that China’s soft patch “seems to be relatively mild” and that domestic household consumption should pick up sooner than anticipated. In a somewhat hawkish hint, Stevens said he wouldn’t discuss inflation or monetary policy outlook but reiterated that RBA inflation target average is 2.0-3.0%. The rates markets are pricing in roughly 22bp of rate cuts by December, slightly lower than prior to the speech. As markets continue to provide a premium of the perceived insulation from western problems, AUD (similarly to NZD) with is high interest rate and decent growth prospects should continue to outperform.
EM Asian currencies continue to show themselves as relatively resilient to events in the western world and we expect this decoupling to continue. Part of the reason for this lack of correlation is that regional growth seems to be occurring despite erosion in European and US economic data. Today Singapore’s Industrial Production came in at 10.5% yoy, outperforming the expected print of 8.8%. While a new record low USDCNY fix at 6.4470 and firm regional equities further hurt the USD.
For today, the main scheduled events in Europe is the release of the preliminary GDP estimate for Q2. Then, US consumer confidence index is projected to fall slightly to 57.0, from 58.8 prior while US home sales is expected to improve to 321k, from 319k in May. We suspect that given the focus on the unresolved debt ceiling issue, the USD will preserve its bearish tone, though the sentiment is happening despite a marginal sell-off in US Treasuries.
08:30 GBP GDP preliminary estimate, % q/q (y/y) Q2 0.1 (0.7) exp
13:00 USD S&P/Case-Shiller 20-city HPI, % m/m (y/y) May 0.00 (-4.65) exp
14:00 USD Consumer confidence index Jul 58.0 exp
14:00 USD New home sales, thous saar Jun 320 exp
13:00 HUF Interest rate announcement, % Jul 6.00 exp/prior
18:00 USD Kansas City Fed President Hoenig
The Risk Today: EurUsd Recent price actions suggest growing optimism in the Euro. Yesterdays break above 1.4462 (bearish trend ceiling) gives this pair a bullish tone. Initial resistance still stands at 1.4522 (intraday high), 1.4578 (4th July high) then 1.4695 (8th June high). We view first support to be located at 1.4324 (22nd July low), 1.4282 (bullish trend floor), 1.3950 (13th July low), then 1.3837 (13th July low) which break would open up a move to 1.3732 (long term bullish trend floor).
GbpUsd Ironically today’s weaker than expected GDP read failed to halt GBPUSD buying. Last week’s break of 1.6221/55 (bearish trend ceiling & 21st June high) 3-month bearish trend give this pair a bullish feel. Momentum indicators have been showing significant divergence indicating this bullish move could have further to go. The break of resistance at 1.6333 (25th high), triggers a move to 1.6442 (14th June high). We should see buyers stepping in around 1.6262 (25th high), 1.6171 (bullish trend floor), 1.6120 (21st July low), 1.6067 (8th July high) then not much noise till 1.5949 (12th July high).
UsdJpy No that’s not a misprint, Yen traders globally are still wondering what last night’s wild spike was all about. Last week’s aggressive selling that pushed the pair below the 79.70 range support has slowed down but downside pressure remains. Falling yields in the US continues to put buying pressure on the JPY but have stabilized. We would be looking to sell rallies below 80.50, as the support is located at 77.90 (intraday reaction low), 77.41 then all time lows at 76.25 (17th March low). After that, the situation become difficult and we should have further saber rattling from Japanese policy makers. Resistance is located at 79.03 (21st July high), 80.38 (12th July high) then 81.48 (8th July high)
UsdChf As we had expected the unwinding of USDCHF short position after of the EU summit was short lived. Today’s move to new all time lows, highlights that the CHF is still in the driving seat. Below 0.8550 (16th June high & bear downtrend ceiling) we remain bearish on the USDCHF and look for opportunity to sell on rallies. Initial support is now located at 0.7997 (intraday low). After that…??? Minor resistance is located at 0.8278 (19th June high), then 0.8331 (13th July high), 0.8521 (8th July high), stronger 0.8551/53 (15th & 16th June high) and 0.8680 (long term bearish downtrend ceiling).
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