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Weekly Fundamental FX Preview – The Silver Lining

It is difficult to find a highlight from this week; is it the compromise between Democrats and Republicans to stave off a bankruptcy and raise the debt ceiling? Two separate failed attempts by central banks to weaken their respective currencies? The ECB’s renewing sovereign bond purchases and emergency liquidity provisions? Or is it the 4.78% plunge the S&P 500 took after Italian and Spanish bond yields ballooned?

Wednesday and Thursday saw both the SNB and the BoJ attempting to weaken their respective currencies but at this stage of the game the market has apparently called the central banks’ bet. Japanese exporters were all too pleased to sell their dollars at the 80 yen level while traders seeking to avoid the euro pushed the EUR/CHF to a new low. Talk of the pair trading at parity sounds more than just a pipe dream given the spread of the euro zone debt crisis to both Spain and Italy.

In response to the pressure being felt in Italian and Spanish bond yields the ECB decided to resume its 6-month refinancing facility, an emergency measure that increases liquidity when at the same time ECB is tightening interest rates. The ECB has also resumed purchasing sovereign debt on the open market but only for the bonds of Portugal and Ireland. This move came with some objection as the Bundesbank was in firm opposition to this step. Markets now await the next move from the euro zone as deterioration in sentiment can be directly tied to events in the euro zone, including the dramatic plunge in equity values over the last two weeks.

But the highlight of the week goes to the US after the President and Republican congressman successfully agreed to raise the debt ceiling while allowing for some austerity measures to be put in place, an often overlooked asset as the European peripheral states can attest to. Tea party hawks were disappointed as the agreement does not address the large social welfare programs that are the main drag on the deficit but the silver lining to legislation may be the budget cuts puts the US on a path of fiscal austerity. Today’s positive non-farm payrolls report may also support the USD as it give the Fed some breathing room at its meeting next week to stave off the Q3 mongers for the meanwhile.

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By Russell Glaser

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.