USD Weighed Down Across the Board As Debt Ceiling Stress Weighs

The longer it takes for the government to come up with a resolution on the debt ceiling, the more nervous market participants become and the higher the risk for default…

• Still no decent progress on US debt ceiling talks
• Reuters poll shows expectation for downgrade
• Softer earnings and weaker data additional strain for buck
• Swiss Franc, Yen and commodity bloc all very well bid
• Aussie finds relative strength on hotter inflation readings
• Hawkish Fed Hoenig comments fall on deaf ears
• Cad FinMin Flaherty concerned with US situation

US government officials have yet to make any decent headway on debt ceiling discussions and market participants are growingly increasingly nervous that there will be a failure to get the debt ceiling raised by the time of the deadline in early August. A recent Reuters poll shows that a majority of economists now believe that at least one of the big three rating agencies will cut the US government's AAA rating, but there is still uncertainty over just how many feel that any downgrade will also bring with it an additional downgrade to the outlook, which could be the more important of the ratings.

As to be expected, the US Dollar continues to get hit hard on this news and shows no signs of recovery just yet. Also seen weighing on the buck have been a slew of disappointing earnings results reflecting slower growth, along with some softer than expected new home sales and a weaker Richmond Fed manufacturing index.

Meanwhile, the Swiss Franc trades by record highs, while the Yen sits just off its record highs from March. The strength in the Yen has been all the more impressive in recent trade, with market participants failing to react to intervention threats from the Japanese administration. The commodity bloc also continues to outperform, with Aussie, Kiwi and Cad all trading just off historical levels.

Both Aussie and Kiwi have broken to fresh post float record highs in Asia following some better than expected consumer confidence data out of New Zealand and a hotter than projected Australian inflation reading. Nevertheless, although Aud/Usd has managed to trip stops above 1.1050, we see any additional upside from here as limited and have gone ahead and attempted an intraday short trade by 1.1050 with hourly studies through the roof and the market looking quite exhausted.

On the official circuit, Fed Hoenig was out on Tuesday with his usual hawkish remarks, although, the comments failed to have any positive impact on the Dollar. The comments have been mitigated by the fact that the Fed official is no longer an FOMC voting member and is expected to retire this Fall. Hoenig has consistently said that he is opposed to additional QE and that near-zero rates can have the undesired consequence of speculation imbalances and major fiscal constraints.

Elsewhere, Canada FinMin Flaherty was on the wires expressing concern over the failed US debt ceiling discussions and stressed the importance of the global economy avoiding more shocks. Mr. Flaherty also let markets know that he was mindful of the rapid appreciation in the Canadian Dollar, but at the same time conceded that the strength was fundamentally justified and reflective of the higher commodity prices.

Looking ahead, German import prices, Swiss KOF and UK CBI trends highlight the European economic calendar, while broader global macro themes relating to Eurozone bailout implementation and US debt ceiling discussions should continue to influence price action. US equity futures are looking less constructive, while commodities are bid with both oil and gold consolidating recent gains.

ECONOMIC CALENDAR

TECHNICAL OUTLOOK

EUR/USD: The market has been carving out a series of lower tops since stalling shy of 1.5000 in early May, and the latest rally still maintains the integrity of this broader downtrend. If the market is to adhere to this broader downtrend, a fresh lower top could take form somewhere below the previous lower top from July 4 at 1.4580. At this point, 1.4580 becomes the key level of resistance, and only a break above this level will officially relieve downside pressures and open the door for a bullish shift in the structure. Until then, we are still in a broader downtrend and would therefore be looking for opportunities to fade the move.

USD/JPY: The latest daily close below 79.50 certainly compromises our constructive outlook with the market breaking down below some solid multi-day range support in the 80.00 area and dropping into the 77.00's thus far. This now puts the pressure back on the downside and opens the door for a retest and potential break below the record lows from March by 76.30. At this point, a daily close back above 79.35 would be required at minimum to relieve downside pressures.

GBP/USD: Despite the latest rally back above 1.6300, the market still remains locked in a broader downtrend off of the April highs, and a fresh lower top is now sought out somewhere ahead of 1.6550 ahead of the next downside extension back towards the recent range lows at 1.5780. Ultimately, only a break back above 1.6550 would delay bearish outlook and give reason for pause.

USD/CHF: Despite the intense downtrend resulting in recently established fresh record lows below 0.8100, short/medium/longer-term technical studies are looking quite stretched to us, and we continue to like the idea of taking shots at buying in anticipation of a major base. The latest declines have stalled by major psychological barriers at 0.8000, and we look for a break back above 0.8280 to reaffirm basing outlook and accelerate gains to even more significant resistance by 0.8550 further up. Ultimately however, it will take a break above 0.8550 to officially relieve downside pressures and force a shift in the structure. Any additional declines to fresh record lows below 0.8000 are viewed as an excellent counter-trend opportunity.

Written by Joel Kruger, Technical Currency Strategist

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