Periphery Debt, Fiscal Conditions in Focus
The US dollar found some reprieve at the start of the week against most of its major rivals, as it took benefit from a one-two punch that hit risk sentiment and favored safer bets. Higher-yielding currencies were first hurt by mounting periphery debt concerns on Friday and Monday, and then by a threat from Standard & Poor’s on the United States’ AAA credit rating. In fact support for the dollar is seen coming more from weakness elsewhere rather than its own strength.
Last Friday, Moody’s downgraded Irish debt to Baa3 with negative outlook and turned up the heat on lingering euro zone debt problems which continue to haunt the European bloc. Moody’s downgrade of Irish debt to almost ‘junk’ status, led periphery yields higher weighing on the single currency.
Debt woes continued Monday, after an article on a Greek newspaper reported that the country’s authorities had asked EU/IMF to re-structure its debt. A German government source later said that they expected Greece won’t make it through the summer without debt re-structuring.
Concern increased after a Finnish election over the weekend saw the ‘anti-euro’ True Finns party gain an important role in parliament fuelling concerns on whether an aid package for Portugal will go ahead as planned.
Probably the most significant and least expected news was Standard & Poor’s threat to cut the US’ AAA credit rating. S&P revised its outlook of the US to negative from stable and warned that this indicates a one in three chance that it could cut its credit rating within the next 2 years. On Tuesday, many expected similar warnings by other rating agencies. The fact that there were no other warnings was seen by many forex analysts as a positive sign for the greenback.
Initially, the dollar was in free fall against all other majors and slipped almost 90 pips versus the euro. However, the greenback soon recouped its losses and was favored by a broader sell-off of riskier assets which drove the dollar and the yen higher. EUR/USD and EUR/JPY both reached 2-week lows hitting 1.4157 and 116.48 respectively.
The dollar is up so far this week against most of its major counterparties but on the losing end against the yen, almost half a percent at the time of writing and 0.40 percent versus the Canadian dollar after stronger inflation data from Canada signaled the re-emergence of inflationary pressures.
Despite the ongoing debt saga haunting the euro, the single currency is expected to continue to be supported by rate differentials as the ECB is expected to continue to tighten policy in contrast to the Fed and the BOJ’s ultra loose monetary policy, while the BoE is expected to lag behind.
Pound lifted by determination to cut deficit
Meanwhile Sterling was firmer versus the single currency for the former part of the week, favored by euro zone debt jitters, as it recovered from a 15-month low hit last week. Cable was also steadier against the greenback on Tuesday, supported by the determination of the UK government to cut deficit in contrast to fiscal conditions in the US and euro zone.
EUR/GBP was down almost 1 percent on the week by the time of writing, as it broke below a rising trendline. RTFX TraderTip monthly scenario suggests the pair should now trade lower towards 0.8716 – 0.8647 and suggests a drop to 0.8726 by the end of the week. GBP/USD monthly scenario, sees the pair rising to 1.6307 – 1.6587.
Risk Aversion Pushes Gold, Yen Higher
Spot Gold (XAU/USD) hit a record high of $1,498.05 an ounce on Tuesday, as increasing risk aversion continued to boost safe-haven flows. Gold was up on continuing periphery debt concerns and rising global inflation. Silver (XAG/USD) was also supported, reaching a 31-year peak at 43.56 by the time of writing.
The Japanese yen also benefitted from its ‘safe-haven’ status. The yen gained against its major counterparties as forex investors cut long ‘carry trade’ positions funded by the yen. The yen is up an average of 1.14 percent against its rivals on the week, with gains of 1.60 percent and 1.95 percent recorded versus the euro and New Zealand dollar.
We expect the yen to trade within a range in the coming weeks as ‘safe-haven’ flows favored by risk aversion continue to lend support to the yen, while rate differentials and recent nuclear crisis are seen weighing on the Japanese currency. Downside moves in EUR/JPY should be supported around 116.05, while upside moves should be capped at 121.50. USD/JPY should be confined between 82.00 and 84.50.
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