By Russell Glaser
Dueling speeches by both Obama and House Speaker John Boehner unsettled the forex market, as the two parties appear to be further away from a deal to raise the US debt limit. The US dollar was down across the board versus the majors as markets may face a potential US default or at least a downgrade of the US’s AAA credit rating.
A WSJ article highlighted the steps elected officials, rating agencies, and large institutional investors are taking to stave off a potential US default. At this stage the two parties seem further apart than ever, as in his speech last night Obama warned of a potential default on US Treasuries. This is in stark contrast to last Friday’s sentiment when it looked as though the two sides were on the verge of a breakthrough.
It is hard to imagine the Democrats and Republicans are playing a game of chicken with the financial markets caught in the middle, but that is exactly the case. The uncertainty has pressured the US 10-year Note with the yield rising to 3% for the first time since early July, though equities have been steady with the Nikkei up almost half a percent while FTSE 100 is down only 0.2%. This lends to the idea that markets expect a positive outcome before the August 2 deadline, a scenario that could spark a “risk-on” environment leading to additional dollar declines.
The USD has not been spared as the dollar declined sharply versus the major currencies in Asian trading and extended losses into the European session. The EUR/USD moved above 1.45 for the first time since July 5, crossing the falling resistance line from the May and July highs. The euro’s recovery against the dollar may have scope to the June high near 1.4700. Support is seen at Friday and Monday’s lows of 1.4325.
Sterling was higher as UK GDP was released in-line with consensus forecasts of 0.2%. While this is a tepid increase, traders were looking for a worse print with expectations down the road for additional quantitative easing from the BOE. Today’s GDP report does not rule out more QE but sets the bar a bit higher. Cable may reach the late May high at 1.6550, not on sterling strength but rather on dollar weakness.
The dollar block currencies were the best performers versus the USD with the NZD/USD rising to a new all-time high. The AUD/USD was up sharply after RBA Governor Stevens said Australian spending will likely rebound. The Aussie dollar moved above its last resistance at 1.0890 before its all-time high at 1.1010. The Loonie broke below last week’s low, with the USD/CAD moving closer toward its next major level at 0.9400.