US reached 11th Hour deal to raise debt ceiling
President Obama and Congressional leaders struck a deal over the weekend to raise the US debt ceiling and avert default. The House of Representatives of the United States passed the bill on Monday, amid strong opposition by the conservative Tea Party and liberal Democrats. Monday’s vote was seen as the biggest hurdle in this US debt ceiling saga as the Republicans hold a majority in the House of Representatives.
In the end, lawmakers approved the bill with a comfortable majority of 269 versus 161. The deal agreed comprises of raising the debt ceiling immediately by $0.9 trillion and $2.4 trillion by early next year. It also includes $2.5 trillion in fiscal spending cuts. The US Senate is yet to approve the deal and the vote is scheduled for Tuesday at 18:00 CET, but is expected to be less dramatic due to the majority held by the democrats within the senate.
The deal enabled the US to pull back from the brink of an economic catastrophe as they avoided defaulting on their financial commitments. However, this does not mean they are out of the woods yet, as they still face a possible downgrade of their prized triple-A debt rating.
Initially, the US dollar found support earlier on Monday, especially against other ‘safe-haven’ currencies such as the Swiss franc and the yen. The greenback surged almost 1 percent against the swissie and the yen. Japan also welcomed the news of a debt deal, as the yen took a breather and relinquished some of its recent gains versus the greenback. Risk appetite also improved, as Asian shares rallied at the start of the week and US stock futures were broadly higher. Higher-yielding currencies such as the Australian, Canadian and New Zealand dollars were extremely bid, while spot gold dipped somewhat away from its record high hit on Friday last week.
Risk Sentiment dampens after initial rally
The rally of ‘riskier’ assets didn’t last long however, as downbeat manufacturing PMI data from the euro zone, Great Britain and especially the US weighed on risk appetite, and Forex investors who had previously took on risk, cut their positions to lock in their profits. Risk aversion was the predominant force again on Tuesday, as markets’ attention again turned on weak global growth and more importantly back to the euro zone debt crisis. Global stocks hit a 2-week trough on Tuesday, as concerns that Italy and Spain are next in line to become victims of the lingering crisis pushed yields to 14-year highs. Sluggish ISM Manufacturing PMI data from the US continued to weigh on risk sentiment earlier on Tuesday.
EUR/USD plunged lower from Monday afternoon after the manufacturing data, falling from a high of 1.4454, reached after the US budget deal, to 1.4185. It continued dipping on Tuesday, down to 1.4158 and almost 0.50 percent by the time of writing. RTFX TraderTip’s weekly scenario predicts the pair should run into significant resistance around 1.4451 and should test lower to 1.4219 zones. The monthly scenario calls for a test of 1.4671 followed by a sell-off to 1.3943 or even 1.3519.
Dollar edges lower versus Swiss franc, Japanese yen
Meanwhile the dollar continued to sink against the yen and the Swiss franc after an initial recovery at the start of the week. The greenback fell to an all-time low on Monday versus the swissie and continued to hover close to its low on Tuesday. Against the yen, the buck inched closer to an all-time trough, reached shortly after the nuclear disaster which hit Japan after a devastating earthquake in March.
The dollar fell more than 1 percent on the week against the franc, but recovered slightly versus the yen, as fears of an intervention by Japanese and other G8 monetary authorities in the currency market limited the yen’s gains. The Swiss franc also traded to an all-time high against the euro on Tuesday, as higher periphery bond spreads weighed on the single currency. The Swiss franc was more than 2 percent higher versus the single currency on the week. For the year so far, the swissie is up more than 16 percent against the dollar, and almost 12 percent against the European single currency.
USD/JPY fell to 76.30 on Monday, a few pips shy of its all-time low, but intervention jitters pushed it back above 77.00. Forex traders are weary about taking fresh bets on the pair’s decline as the Bank of Japan and Japan’s Finance Minister Noda continue to reiterate that they are watching FX markets very carefully, and unknown sources claimed that the central bank may loosen monetary policy further at this week’s meeting.
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