Today's NY session has a decidedly "risk-off" sentiment as we have had several developments overnight weighing on traders and investors.

  • ""S&P 500 has moved through its lows today as we continue to have an impasse in the US debt ceiling and debt/deficit reduction negotiations.
  • The drop in equities exacerbated by weak US durable goods orders, a sign that manufacturing output will be soft in the coming months. Business spending on capital investment fell.
  • In Europe, the German Finance Minister said that the EFSF will not have "carte blanche" to buy bonds on secondary market, increasing uncertainty around the EU Summit proposals, mainly as there is now a lack of clarity in regards to execution risks.
  • Italian and Spanish stock markets come under pressure, declining for a 3rd session, while both country's 10-year yields rose, a sign of increased concern again around the Euro-zone periphery sovereign debt situation.
  • In the UK we saw a sharp fall in manufacturing orders from the CBI Industrial Trends Orders survey, which implies that manufacturing in the UK will be soft in the coming months as well, a blow to the economy after we saw pretty tepid growth in the 2nd quarter (+0.2% q/q) earlier in the week.

Bring all of these risk-off events together and we have a jittery NY morning session with equities down and investors looking for safety amid concerns about debt on both sides of the Atlantic and softer data pointing to trouble for the 3rd quarter.

As a result we are seeing guess who - the beleagured USD - catching some bids as Treasury's are still sought out in times of financial duress. The other safe havens catching a strong bid are gold, the CHF and JPY.

  • The USD manged to pare some of its losses from yesterday and overnight against the EUR and GBP, two of our higher yielders and both with negative fundamental developments in today's session.
  • We see the USD also paring some of its losses against the Asian commodity currencies (AUD and NZD) as well as the Canadian Dollar.
  • In the morning session, the USD even held its own against the JPY and CHF.

It's certainly interesting that as the financial markets focus on the US debt negotiations, and have been selling the USD over the week, the USD can still muster some gains when we are in a decidedly "risk-off" theme with US equities tanking. Dow Jones Index was off 118 points and the S&P down 19.25 as of 10:40AM ET.

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Will these short term moves in favor of the greenback simply set up entry points for USD bears to load up on USD short positions? From my viewpoint that is the most likely outcome as long as the debt ceiling vote continues to be elusive and the closer we get to the August 2nd deadline.

The problem is that beyond an increase in the debt ceiling, the US is still in danger of losing its AAA credit rating, which while not having the same implications as a default, but will increase borrowing costs on the US and on US companies and households, costing the US around $100 billion a year according to a Bloomberg article. That will keep the pressure on the Fed to keep its loose monetary policy, and put the USD at a disadvantage in interest rate yields.

In any case, we should monitor this most recent move in the USD and see if there are entry points to be had on the opposite side, especially against the currencies showing increased strength of late - the AUD and NZD - which have been propped up by shifting interest rate expectations.

Nick Nasad
Chief Market Analyst
FXTimes