Focus Remains on US Debt Ceiling Debate

July 28 2011 by Spencer McKay in Forex Release |No Comments

USD continues to trade on back footing as political infighting over raising the US debt ceiling erodes the market’s confidence in the US and the USD. EURUSD pushed up to 1.4536, but with regional equities mixed was unable to trade higher. USDCHF continues to pressure the 0.8000 handle taking quick trips below the psychological level. AUD was the big winner in FX trading taking out stops above 1.10 running up to 1.1063. The catalyst was the CPI upside surprised at 0.9% vs. 0.7% q/q, 3.6% vs. 3.4% y/y exp. The rates market is still pricing in an 8bp cut (down from yesterday 22bp exp) by the year’s end. Obviously, the sudden shift in growth, inflation indicators and optimistic comment from Governor Steven suggests that a rate hike or at least a shift towards more hawkish statement is an increasing probability.

The US debt deadlock continued as Speaker John Boehner’s two-step strategy to increase the U.S. debt ceiling was blocked by Congressional Budget Office who stated that the proposal would cut the deficit by less than it actually claims. The failure of Republicans to stick to proper accounting practices would have surely given President Obama the authority to veto the plan. As we have stated, we suspect that the negotiations and horse trading will go till the 11th hr before a “grand bargain” is struck. However, the damage to the USD’s reputation and reaction by credit rating agencies are more of a certainty. There is a significant risk that the rating agencies do not find them credible and would lean towards a potential downgrade. We continue to anticipate US weakness until the August 2nd deadline.

Yesterday, Reuters cited unnamed Japanese policymakers are contemplating that FX intervention is a real near-term solution. The Reuters quote from an unnamed JP source combined with yesterday’s eerie spike in Asian trading has clearly set markets buzzing. On one hand, you have the JPY which on a trade weighted basis is considerably overvalued. But on the other hand, there is not the sense of urgency policymakers felt after the earthquake. Most traders seem under the false sense of security that the last coordinated intervention failed miserably and policymakers are unlikely to move in just yet. We feel the MoF is closer to act than the market is currently pricing in. The tight trading pattern seen today hints that speculators are nervous about taking the short side. We suspect that at 78, Japan will continue to use verbal intervention to keep traders looking over their shoulder. However, should the divisive politics continue to interfere with the US governments ability to raise the debt ceiling and kicks off another round of USD selling /safe haven buying…there is no need to schedule global calls with policymakers, Japan is ready and has its finger on the trigger.

On this light calendar day, we should take the a moment to discuss the European crisis. We still believe that an eventual cash bailout will be passed to temporarily appease the market. While the EU summit rescue package for Greece has lowered the near-term threat of a Greek collapse and halted contagion fears in the euro zone, it has far from eliminated the risk (this is why EURUSD gains have been grindingly slow). But the bribe to banks and Greek policymakers has not solved any structural issues nor done much to address the fundamental problems seen in Portugal, Spain and Italy. All the while, the erosion in regional economic data, highlighted by weak PMIs, suggests that a tough time may be ahead for the peripherals and now spreading into the core countries. While debating the nuances of the bailout deal would be arduous and unrewarding, the fact remains that without real growth the Union is on borrowed time.

Today, US Durable Goods orders, Oil inventory data, Fed’s beige book are the important economic releases today but markets are still worried about developments in the US as the deadline of Aug 2 nears and the US government hasn’t even reached agreement on debt limits.

09:30 CHF KOF Swiss Leading Indicator (Jul) index 2.11 prior
18:00 USD Fed’s Beige Book
21:00 NZD RBNZ Official Cash Rate 2.50% exp
00:00 EUR Germany CPI (Jul P) y-o-y 2.20% 2.30% 2.30%
00:00 EUR Germany CPI – EU Harmonised

The Risk Today: EurUsd Recent price actions suggest growing optimism in the Euro yet bullish moves have been painfully slow. Mondays break above 1.4462 (bearish trend ceiling) give this pair a bullish tone. Initial resistance still stands at 1.4536 (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 yesterdays 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 gives this pair a bullish feel, supported by new highs. Recent pattern of breakout, consolidation breakout etc means we should see some consolidation before the next move higher. The break of resistance at 1.6333 (25th high), has triggered a move to 1.6442 (14th June high), then 1.6558 (31st May 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 Lots of chatter about a solo Japanese intervention, means downside should be taken cautiously. Last week’s aggressive selling that pushed the pair below the 79.70 range support has slowed down but downside pressure remains. We would be looking to sell rallies below 80.50, as the support is located at 77.41 then all time lows at 76.25 (17th March low). After that, the situation become difficult and we should have aggressive saber rattling if not an outright MoF intervention from the Japanese. 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 0.7996, 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 0.7996 (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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