Evidence suggests the USD is weakening on the ongoing impasse over the
budget and debt ceiling debate. But why is the fallout only being felt
in the currency market if we’re all supposed to be so scared?
The USD crumbled anew late yesterday, some minutes after president Obama’s speech on the budget deficit/debt ceiling issue as he pleaded for compromise. Meanwhile, there is no sign of said compromise and the two sides seem ready to play chicken all the way to the wire – which supposedly can be found next Tuesday, though at least one Wells Fargo analyst was out saying recently that he believed the Treasury could jump through enough hoops to keep the government out of default for another month or more. One would think that if we are to be so afraid of the fallout from the debt ceiling not getting raised, there would be a generalized sense of gloom and we’d see a broader risk off stance in markets.
But we’re not, we’re merely seeing a further run-down in the USD, while government bond markets are relatively stable, equities are nosing around close to the cycle highs, and pro-cyclical commodities like copper and oil are within a stone’s throw of the cycle highs (okay – copper is a bad example, copper has morphed into something grotesque and semi-financialized, if not fully financialized in China). Something doesn’t add up – and the crystal ball is cloudier than ever – but we have a hard time imagining that the participation in this latest move is particularly heavy. Only once a debt deal is struck in coming days will we know the extent to which the issue has held the market in its thrall.
RBA’s Stevens pleads no comment
The RBA’s Stevens was out in Australia speaking, but refused to comment directly on policy, as his prepared speech was meant to be on Australia’s “cautious consumer” and generally avoided any pointed remarks on monetary policy. The gist of his speech pointed to continuing weak consumption due to the credit cycle now having peaked, as the mid-90’s to mid-00’s boom, and the expression of relief that the downside of the credit cycle has so far been vastly eased by the strength in the resources extraction industries.
The comments were generally hopeful, as rising savings rates would possibly point to consumers righting their balance sheet wrongs in coming years. He did drop the comment that the Australian dollar is “quite high” and that he saw the “immediate need” for the US to move its debt limit. The market hardly reacted to the speech and the Aussie’s run higher was a passive response to the weak USD and still positive risk environment and commodity rally.
The USD crumbled anew late yesterday, some minutes after president Obama’s speech on the budget deficit/debt ceiling issue as he pleaded for compromise. Meanwhile, there is no sign of said compromise and the two sides seem ready to play chicken all the way to the wire – which supposedly can be found next Tuesday, though at least one Wells Fargo analyst was out saying recently that he believed the Treasury could jump through enough hoops to keep the government out of default for another month or more. One would think that if we are to be so afraid of the fallout from the debt ceiling not getting raised, there would be a generalized sense of gloom and we’d see a broader risk off stance in markets.
But we’re not, we’re merely seeing a further run-down in the USD, while government bond markets are relatively stable, equities are nosing around close to the cycle highs, and pro-cyclical commodities like copper and oil are within a stone’s throw of the cycle highs (okay – copper is a bad example, copper has morphed into something grotesque and semi-financialized, if not fully financialized in China). Something doesn’t add up – and the crystal ball is cloudier than ever – but we have a hard time imagining that the participation in this latest move is particularly heavy. Only once a debt deal is struck in coming days will we know the extent to which the issue has held the market in its thrall.
RBA’s Stevens pleads no comment
The RBA’s Stevens was out in Australia speaking, but refused to comment directly on policy, as his prepared speech was meant to be on Australia’s “cautious consumer” and generally avoided any pointed remarks on monetary policy. The gist of his speech pointed to continuing weak consumption due to the credit cycle now having peaked, as the mid-90’s to mid-00’s boom, and the expression of relief that the downside of the credit cycle has so far been vastly eased by the strength in the resources extraction industries.
The comments were generally hopeful, as rising savings rates would possibly point to consumers righting their balance sheet wrongs in coming years. He did drop the comment that the Australian dollar is “quite high” and that he saw the “immediate need” for the US to move its debt limit. The market hardly reacted to the speech and the Aussie’s run higher was a passive response to the weak USD and still positive risk environment and commodity rally.
UK GDP
The UK GDP was out more or less in line with expectations, and this combined with a continued rise in sovereign debt spreads on the European mainland finally saw a turnaround in the chugging EURGBP rally, as apparently the market was girding for a worse GDP reading and had perhaps been placing the pound in the same bucket as the dollar on the general deficit/debt sustainability worries (though there have been fewer signs of this pressure in CDS prices for UK government debt.
Chart: EURGBP
EURGBP finally turned a corner after chugging higher for a number of days. The pound’s weakness coming into today has been a bit surprising considering the renewed ratcheting wider of sovereign debt spreads in Europe. Today’s spike high and reversal gives the bears some short term hope and draws a line in the sand for now for upside resistance. The focus lower may be the 200-day moving average below 0.8700 area, though the zone just above 0.8700 has supported the pair twice recently.
Spanish and Italian debt auctions
Spain was unable to sell its hoped for allotment of 3- and 6-month bills today (€2.89B vs. target of €3B), with a bid to cover ratio of 2.15 vs. 3.84 in Jun. Meanwhile, Italy met its target at the auction, though the yield was the highest since 2008. Considering the renewed rise in sovereign debt spreads on the day, the avoidance of new EURCHF lows is somewhat interesting, though there’s not enough follow through to suggest the pair is out of the woods – we’d need to see new wides in the Euro sovereign debt spreads without a new low in EURCHF for a couple of days to get a good signal that the CHF rally is tiring.
Looking ahead
Boehner will present his go-it-alone debt ceiling/budget bill today to the House of Representatives, and exercise that will be in vain as Obama will veto it, but he will have made his political point. Otherwise, watch out for the US data at 1400, including Consumer Confidence, the Richmond Fed Manufacturing Survey and the New Home Sales figure.
The Australian CPI data is up in Asia and could exert strong pressure on the AUD crosses. It may be a difficult data point to react to, since inflation was clearly still charging higher in April before easing back in May and June.
Economic Data Highlights
Spain was unable to sell its hoped for allotment of 3- and 6-month bills today (€2.89B vs. target of €3B), with a bid to cover ratio of 2.15 vs. 3.84 in Jun. Meanwhile, Italy met its target at the auction, though the yield was the highest since 2008. Considering the renewed rise in sovereign debt spreads on the day, the avoidance of new EURCHF lows is somewhat interesting, though there’s not enough follow through to suggest the pair is out of the woods – we’d need to see new wides in the Euro sovereign debt spreads without a new low in EURCHF for a couple of days to get a good signal that the CHF rally is tiring.
Looking ahead
Boehner will present his go-it-alone debt ceiling/budget bill today to the House of Representatives, and exercise that will be in vain as Obama will veto it, but he will have made his political point. Otherwise, watch out for the US data at 1400, including Consumer Confidence, the Richmond Fed Manufacturing Survey and the New Home Sales figure.
The Australian CPI data is up in Asia and could exert strong pressure on the AUD crosses. It may be a difficult data point to react to, since inflation was clearly still charging higher in April before easing back in May and June.
Economic Data Highlights
- New Zealand Jun. Trade Balance out at 230M vs. 400M expected and 551M in May
- Japan Jun. Corporate Service Price Index out at -0.7% YoY vs. -0.9% expected and -0.9% in May
- Australia May Conference Board Leading Indicators Index out at -0.1% vs. +0.2% in Apr.
- Japan Jul. Small Business Confidence out at 47.1 vs. 43.1 in Jun.
- Germany Aug. GfK Consumer Confidence out at 5.4 vs. 5.6 expected and 5.5 in Jul.
- Switzerland Jun. UBS Consumption Indicator out at 1.48 vs. 1.88 in May
- Sweden Jun. PPI out at +0.1% MoM and -0.2% YoY vs. +0.2%/-0.1% expected, respectively and vs. +1.0 YoY in May
- UK Q2 GDP out at +0.2% QoQ and +0.7% YoY vs. +0.2%/+0.8% expected, respectively and vs. +1.6% YoY in Q1.
- UK May Index of Services out at +1.6% MoM vs. +0.8% expected
- US May S&P CaseShiller Home Price Index fell -4.51% YoY vs. -4.50% expected
- US Jul. Consumer Confidence (1400)
- US Jul. Richmond Fed Manufacturing Index (1400)
- US Jun. New Home Sales (1400)
- US Fed’s Hoenig to testify on monetary policy (1800)
- US Weekly API Crude Oil and Product Inventories (2030)
- New Zealand Jul. NBNZ Activity Outlook and Business Confidence (0100)
- Australia Q2 Consumer Prices (0130)
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