As the deadline for the United States to raise its debt ceiling approaches, congressional leaders remain divided and a deal to avoid a “reckless” default is far from being reached.
President Barack Obama on Monday called on Congress to reach a compromise that will allow the US to pay its bills and avoid a national default which he labelled reckless.
Obama addressed the nation appealing to leaders of both parties, stressing the importance not only to raise the debt ceiling to avoid default, but also to agree on budget cuts to reduce deficit and secure America’s future. He also stressed the severe consequences of a default, or an unprecedented downgrade of the US’s prized triple-A rating.
The stalemate in talks has contributed to uncertainty in the markets, fuelling risk aversion at the start of the week. Global stock markets were lower on Monday, while ‘safe haven’ assets such as the Swiss franc and gold received a boost. The dollar was under pressure at the start of the week, dropping to fresh lows against many of its major rivals.
EUR/USD opened almost 50 pips higher on Monday from Friday’s close and jumped to a three-week high on Tuesday. But the euro pared some of its gains versus the dollar on Monday and was under pressure against the swissie and the yen after Moody’s cut Greece’s sovereign rating by three notches to Ca, leaving it just one notch above the lowest possible rating.
The greenback was down more than 0.80 per cent on the week versus the single currency by the time of writing, and around 1.75 per cent lower versus the swissie. It was also down around one per cent against commodity-linked currencies such as the New Zealand dollar and the Australian dollar, and 0.50 per cent versus the Canadian dollar.
On Thursday of last week, eurozone leaders agreed on a second bailout package for ailing Greece. The financial aid package will consist of another €109 billion coming from eurozone nations and another estimated €50 billion from private sector bond holders. It was also agreed that institutional bond holders will swap their existing Greek debt for longer-dated securities.
The European Financial Stability Facility will be allowed to act on the bond market and avert contagion by intervening on the secondary market given ECB acquiescence. Furthermore, the EFSF may also act to provide precautionary credit lines to eurozone nations that may not be able to access credit markets. In the summit, measures to contain the risk of contagion were also drawn up, and provisions to limit the impact from rating agencies declarations were also taken.
The positive outcome boosted the single currency initially versus the dollar, but eased at the end of last week. Forex investors were looking past the deal struck and instead focused on the actual details of the deal, as analysts pointed out the possible risks of implementing a deal too fast and also questioned the long-term debt sustainability.
RTFX TraderTip suggested a range of consolidation on the EUR/USD pair for this week. It set lower and upper boundaries at 1.4109 and 1.4533 respectively and predicts that a break of one of these levels would result in a continued breakout lower or higher.
The Swiss franc was extremely bid at the start of the week. It benefited from heightened risk aversion as forex investors favoured its ‘safe-haven’ status given the uncertainty surrounding the increasing concerns over a possible default by the US and Greece’s downgrade by Moody’s. The swissie hit a new all-time high versus the dollar on Tuesday, and also rose sharply versus the euro. USD/CHF traded down to 0.7998 on Tuesday.
Spot Gold (XAU/USD) also benefitted from lower risk sentiment and investor flows to ‘safety’, as it surged to a fresh all-time high. Gold hit $1’623.75 on Monday, and is up more than seven per cent on the month so far. The swissie was up by an average of 1.25 per cent against its major rivals for the week.
Given uncertainty surrounding the US debt situation, investor’s concern is cautiously rising, but as yet the market looks as if it is still willing to give the US the benefit of the doubt, for now. Nonetheless, as August 2 nears, forex markets may become increasingly volatile. Recent moves in USD/JPY and USD/CHF suggest that traders are positioning themselves for bad news. Higher-yielding currencies such as the Australian and New Zealand dollar may come under pressure especially if there are no hints of a deal in sight.
Upcoming FX key events:
Today: German unemployment change, EZ Economic Sentiment, and US pending home sales.
Tomorrow: US GDP Advanced, GDP Deflator, and PCE Core.
FX Technical key points:
EUR/USD is neutral.
EUR/GBP is bullish, target 0.9150, key reversal point 0.8700.
USD/JPY is neutral.
GBP/USD is neutral.
USD/CHF is bearish, target 0.7950, key reversal point 0.8500.
AUD/USD is bullish, target 1.1050, key reversal point 1.0450.
NZD/USD is bullish, target 0.8900, key reversal point 0.8200.
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Mr Xuereb is a trader at RTFX Ltd.