The US Dollar is mixed heading into the weekend as investors weigh the threat of a looming debt default in the US versus the dollar's attraction as a "safe-haven" currency. Congressional leaders appear farther than ever from reaching a deal with Republican Speaker of the House Boehner delaying a vote on his budget proposal yet again. President Obama urged lawmakers this morning to make a deal, making it clear that this so-called crisis has been completely avoidable and prolonging the deadlock risks turning a political battle into a true economic calamity. However, the President did also make it clear that Boehner's plan was dead in the water and wouldn't pass through the Senate even if it made it out of the House. The administration still has options, including invoking a section of the 14th amendment to unilaterally raise the debt limit should a deal not be made on the Hill, but they do risk strong political opposition and even possible impeachment for the President. The turmoil has prompted investors to look for alternatives to the USD as the August 2nd deadline for raising the debt ceiling fast approaches. Dour negative data this morning has also weighed on the dollar with growth, manufacturing, and confidence numbers all missing the mark. Most notably, Q2 GDP expanded by a mere 1.3% on an annualized basis, far short of the 1.8% expected. The previous reading was also downwardly revised to 0.4% from the original 1.9%. Chicago PMI came in at 58.8, down from 61.1 in May, and University of Michigan Confidence dropped to 63.7, the lowest reading in more than two years.
The EUR is back towards the top of its weekly range after trading through a volatile overnight session. The common currency initially came under selling pressure after Moody's put Spain's sovereign debt rating under review and downgraded the rating of six of its provinces. The move has prompted yields on Spanish debt to spike yet again, pushing back above the key 6.0% threshold for the first time in a week. While much attention has been paid to Greece, Ireland and Portugal, and their collective struggles with debt over the past 18 months, fear that the debt contagion is spreading to larger Eurozone members, most notably Spain and Italy, has limited the common currency's upside potential. Nevertheless, investors are turning to the EUR as the primary alternative to the USD with Congress struggling to raise the US debt ceiling.
Sterling is higher this morning on broad dollar weakness. A measure of British consumer sentiment declined in July, fueling speculation that the BoE will delay raising interest rates. Nevertheless, the unfolding debt saga in the US and the Eurozone has supported the pound as an alternative to both countries' currencies. While the GBP will likely remain supported in the near term, slow growth and worsening fundamentals will limit any lasting gains.
The JPY continues to grind higher this morning, edging ever closer to the all-time high reached in wake of the earthquake and tsunami earlier this year. The yen's appeal as a "safe-haven" currency has prompted the recent gains as both the US and Eurozone struggle with mounting debt. While the appreciating yen will erode the competitiveness of Japanese exports, officials have made it clear that intervention is unlikely. However, in an attempt to calm volatility, Japanese authorities will enact tighter restrictions on retail margin FX trading, lowering the limit to 25 times an investors committed capital from the current 50x currently in place.
The CHF also reached a record high this morning as investors seek its perceived safety. A report this morning showed that the SNB lost over 10B CHF last year on its FX holdings, primarily comprised of USD and EUR, as the CHF appreciated against both. When asked if the Bank would consider another formalized round of intervention, SNB policymakers told reporters a resounding "no."
The Commodity Currencies diverged overnight with the CAD and AUD both paring recent gains while the NZD and ZAR pushed higher. After the disappointing GDP report out of the US, commodities have slipped into the red. Oil fell to $95/bl, copper dropped to $443/lb and consumables like soybeans and corn were down nearly 2%. Gold on the other hand, has extended its recent gains, reaching a new all-time high of $1622/oz as investors flock to the precious metal with confidence waning in the two main fiat currencies, the USD and EUR. The CAD came under pressure this early morning, hit by both domestic and foreign economic growth reports. Canadian GDP unexpectedly contracted by 0.3%, the biggest drop in two years, and the US economy, Canada's primary export market, grew at a far slower pace than expected. The AUD is also lower this morning, pulling back from its recent all-time high as investors exit riskier positions. The NZD on the other hand pushed higher this morning, reaching a new all-time high of 0.8725 as investors price in higher interest rates after hawkish commentary from the RBNZ earlier this week.
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This market summary is prepared by Union Bank's Global FX Department for the general information of its customers. It is based on the most accurate information currently available, but should not be considered investment advice or a guarantee of future exchange rates or trends..