Commodity Currencies Rally Ahead of U.S. Debt-Limit Vote

The commodity currencies, most notably the Canadian Dollar and the New Zealand Dollar, were among the strongest major currencies in the pre-North American trade as rate hike expectations rose for the Bank of Canada, and the Reserve Bank of New Zealand hinted at a rate hike in the near future following Wednesday's meeting. Rising energy costs have added increased inflationary pressures on the Canadian economy, which in turn have raised rate hike expectations for the world's eleventh largest economy. Currently, there are 49.5-basis points priced into the Loonie over the next 12-months, while there are 111.0 priced into the Kiwi for the same time frame.

Kiwi-Dollar 10-minute Chart: July 26 to 27, 2011

Charts created using Strategy Trader– Prepared by Christopher Vecchio

The Swiss Franc was also particularly strong in the overnight session, though had fallen back towards its opening price level against the U.S. Dollar, at the time this report was written. The Franc, again, had strengthened against the Greenback in the Asian and European sessions, marking the fourth consecutive day of appreciation against its American, to an all-time high of 0.7989, ahead of today's vote on the debt ceiling.

Another round of voting is due to occur in the U.S. House of Representatives today, with Republican lawmakers pushing across their agenda for a second time, that, for a second time, will face a wall of unified Democrats in the Senate, making it highly unlikely that bill will pass through and become law. As such, the debt debate is expected to drag on for more days, as the country creeps towards a potential default on August 2, which President Barack Obama has declared would have “cataclysmic” repercussions on the economy.

Thus far, the Dow Jones FXCM Dollar index has gained for the second consecutive day, from the low yesterday at 9331.87 to today's high, around 13:10 GMT, at 9414.67. The index has pushed higher as the Euro has slid sharply the past two days, even as other components of the index, such as the Australian Dollar, have rallied against the Greenback.





Fundamental Headlines

• Banks Find New Signs of Default Distress in Repo, Credit Markets – Bloomberg

• Treasuries Join Stocks Dropping in Markets Overwhelmed by U.S. Debt Debate – Bloomberg

• Weekly Claims Dip Below 400K, Providing Jobs Hope – CNBC

• Fed Under Fire Over Defaults Talks – Financial Times

• Republican Debt Plan Faces Close Vote in Congress – Reuters

NZDUSD: The NZD/USD pair remained resilient, gaining for the seventh time in eight days, boosted by yesterday's commentary by the Reserve Bank of New Zealand following the rate decision, in which rates were unchanged at 2.50 percent. In fact, the commentary following the meeting noted that there could be a rate hike in the near future and that only if the strong Kiwi is able to contain inflationary pressures, would a rate hike be unnecessary. On the other hand, it was noted that the strong domestic currency has started to drag on economic growth.

Taking a look at price action, like the Aussie, the Kiwi remains in unchartered territory, and with such strong rate hike expectations building, it is difficult to call a ‘top' in place as the NZD/USD pair continues to rally in spite of global factors signaling a necessary shift to risk-aversion amid uncertainty in the Euro-zone and the United States. As such, while key technical indicators, such as the daily RSI, signal that the pair is overextended, they will be monitored on the side for now as they have been futile in forecasting price movement in the near-term for the Kiwi.

Written by Christopher Vecchio, Currency Analyst

To contact the author of this report, please send inquiries to: cvecchio@dailyfx.com

Follow Christopher Vecchio on Twitter: @CVecchioFX