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Wednesday, 27 Jul 2011
Dollar Pressured As Debt Ceiling Deadline Draws Near
The dollar has been pressured as the gridlock in Washington increases with the August 2nd deadline for Congress and the President to raise the debt ceiling. The Republican plan presented by House Speaker John Boehner collapsed as the Congressional Budget Office said the plan would fail to meet Boehner's own deficit cutting expectations and therefore will not be voted upon on Wednesday as planned, further delaying a potential solution to raise the debt ceiling. Financial pressure is being felt predominantly in the US dollar whereas yields on US government bonds actually fell yesterday.
USD - Dollar Trades at Lowest Level since May
The Congressional Budget Office informed the GOP that the plan presented by Speaker of the House John Boehner would only cut $850 billion from the budget deficit. Boehner himself had pledged to initially cut $1.2 trillion in spending over the next 10 years. In a blow to Republicans the bill will be sent back for rewriting and throw a wrench in a potential solution to raise the US debt ceiling.
While the debt ceiling negotiations takes the limelight US data yesterday showed disappointing data that fed into USD selling. Housing data continues to drag with the S&P Case-Shiller HPI showing a dip in housing prices by -4.5%. New home sales fell short at 312K on expectations of 321K while the Richmond Manufacturing Index declined to -1 from 3. A bright spot in yesterday's data were increasing consumer confidence numbers but the three previous negative data releases combined with a very public debt ceiling fight had the greenback on its back foot.
Strong gains were booked against the dollar by all of the G7 currencies with significant moves in the dollar block currencies. Pressures in the financial markets are predominantly felt in the USD with the dollar index falling to a low of 73.446. The last time the dollar index traded this low was in May. Despite the USD weakness it appears that real money portfolio managers are expecting a positive outcome from the debt ceiling struggles as the yield on the 10-year note actually fell yesterday back below the 3% level. 30-year Treasuries also strengthened. If markets were forecasting a US default, pressures would be felt in the US government bond yields.
GBP - GDP Weak but Enough to Boost Sterling
Sterling performed well yesterday after Q2 GDP numbers came in line with consensus forecasts at 0.2%. Traders were largely expecting a more disappointing figure. While growth of 0.2% is nothing to brag home about and does signal a stagnant UK economy, a figure that came in below this level may have supported additional asset purchases by the BOE. The GDP report does not rule out more quantitative easing but sets the bar a bit higher for additional easing of monetary policy. While the British pound is certainly no prize, in a contest of the least ugly with the dollar and the euro, it may just be pulling ahead.
The GDP data helped cable climb to its highest level since mid-June, rising above the previously broken trend line from the May 2010 low. The next resistance for the GBP/USD is found at the end of May high at 1.6550. Support is located at this week's low at 1.6220.
AUD - AUD and NZD Trade at 30-year highs
The dollar block currencies were the strongest performers yesterday versus a weak US dollar. The AUD was supported by both comments from RBA Governor Stevens who suggested the Australian economy is improving and talked down a potential interest rate cut this year. Inflationary pressures also supported the AUD. Q2 inflation climbed 0.9% on consensus forecasts of 0.7%. Following the data release this morning traders pushed the AUD/USD to a 30-year high. The next target for the AUD/USD is the big round number at 1.1100.
The Kiwi is also trading at a 30-year high after strong business confidence numbers helped to boost the New Zealand dollar. Tonight the RBNZ is expected to keep the cash rate steady at 2.50% but the accompanying rate statement could contain more hawkish language given the strong GDP the New Zealand economy produced in H1. Any hint of an interest rate increase could boost the NZD/USD to the next big round number at 0.8800.
Gold - Gold Trades at New All-Time High
Spot gold climbed to a new all-time high at $1,625. This is the second consecutive day the price of spot gold has reached a new high as traders worry over the US debt ceiling crisis. Spot gold may also be receiving a bid due to the potential for the US to lose its AAA rating. S&P has warned its highest rating could be in jeopardy if the US doesn't cut $4 trillion from the debt. On Monday President Obama warned the US could lose its rating for the first time in history. More gains in the commodity could be booked should Congress and the President fail to come to an agreement over the debt ceiling.
The EUR/USD has taken a step away from the edge after failing to get a close below its 200-day moving average and the price is testing the falling trend line from the May and July highs at 1.4450. Short term momentum is currently rising and break above this resistance line may find resistance at the peaks from July, June, and May at 1.4580, 1.4700, and 1.4940 respectively. However, a bearish tweezer candlestick pattern has formed on the daily chart from last week's highs on Thursday and Friday, strengthening the argument for the 3-month old resistance line to hold. Support is found at 1.4015, 1.3835, and 1.3780 from the rising trend line off of the June 2010 low.
After dipping as low as 1.5780 which is the 38% Fibonacci retracement level from the May 2010 to April 2011 move, Cable has broken above both the neckline from the head and shoulders pattern and the resistance line falling from the April and May highs. The pair has now found resistance at the previously broken trend line from the May 2010 low and now serves as initial resistance at 1.6360. A move above this line will likely go on to test the May high at 1.6545 though sterling bears may make a stand before the April high of 1.6745. To the downside support may come in where the neckline and the previous resistance line off the April and May highs intercept at 1.6190. Additional support is located at 1.6000 and the July low at 1.5780.
The reemergence of yen strength has taken the USD/JPY one step closer to its all-time low at 76.11. Falling stochastics on the monthly, weekly, and daily charts all point to additional declines in the pair. Initial support is found at 78.20 followed by the lower line from the falling wedge pattern from December 2008 which comes in at 77.50. A move higher may find resistance at 79.60 and 81.50.
An attempt to push the USD/CHF higher ran into resistance at 0.8270. Since failing to hold any gains the pair looks to test the most recent all-time low at 0.8080. Any attempt to move the pair higher will likely encounter resistance at 0.8270 and 0.8385 from the falling trend line off the February high. Relative value sellers of the pair may also be lurking at 0.8550.
The Wild Card
The Aussie dollar surged to a 30-year high after Australian Q2 CPI rose 0.9% on consensus forecasts of only 0.7%. There has been a big move higher in the AUD as traders scale back their expectations for an interest rate cut later this year. forex traders should note the next target for the AUD/USD is the big round number of 1.1100. Support is found at 1.1010 and 1.0890.
|13:30||USD||Core PCE Price Index||m/m||0.1%||0.1%||0.1%|
|13:30||USD||Employment Cost Index||m/m||0.7%||0.6%||0.7%|
|14:55||USD||Revised UoM Consumer Sentiment||86.4||86.4||-|
|14:55||USD||Revised UoM Inflation Expectations||2.8%||-||-|