Tag Archives: US dollar

Buy USD on Debt Ceiling Resolution, RBNZ Holds

Not long ago, Geithner was pronouncing the US would never lose its top rating but now the market is in the process of pricing in a downgrade. The S&P 500 fell 2% to 1305 on Wednesday and is the process of putting in its worst weekly performance in almost a year. The consensus is that the US dollar will continue to fall but it may not be as straight-forward as advertised. A continued decline in the stock market will provide a safe-haven boost to the USD as will higher bond yields. The resulting slowdown in the US economy may also weigh more heavily on Canada with risks to the other commodity producers and the economies most tied to US consumption.

At the moment, the situation is looking dire but what’s has been lost is that DEBT CEILING NEGOTIATIONS ARE MAKING PROGRESS. Boehner is reworking his proposal and appears to have his own party on board. Reid is also looking for additional cuts in order to satisfy the dollar-for-dollar demands from Republicans. The sides now don’t appear all that far apart and we estimate a 75% probability that will we have the framework for an agreement before markets close on Friday.

This will present the opportunity for a significant relief rally in the time between the passage of the legislation and decisions about the credit rating. There’s also the distinct possibility that the ratings agencies don’t have the courage to downgrade the US. Based on this, there is room for a bounce in USD/CHF and USD/JPY — both may have stabilized and at oversold levels.

We will enter longs in both these trades ASAP. Follow @FX_Button  on Twitter for live updates

THE RBNZ HELD RATES AT 2.50% as expected and Bollard said the economy grew more strongly than expected. The central bank leader telegraphed an upcoming rate hike by saying there is little need for the 50 bps March “insurance” rate cut to remain “much longer”. The market has priced in 100 bps in hikes in the next 12 months but nothing beyond 50 bps is guaranteed. Bollard may have done a good job talking down NZD by nothing that if the currency’s strength persists, it will reduce the need for rate hikes.


US Dollar Declines, Swiss Franc Rallies on Debt Ceiling

The US dollar didn’t get the walloping some expected (or would like) on Monday despite slow progress in debt ceiling talks. The one exception was the Swiss franc which shot higher across the board on risk aversion.

Two debt ceiling plans were unveiled on Monday: 1) Senate Democrats proposed $2.7 trillion in savings over 10 years with nearly half coming from defense spending cuts. 2) House Republicans called for a two-part plan that would raise the ceiling $1 trillion this year and $1.6 trillion next with even larger spending cuts. The second tranche would require $1.8 trillion in cuts to Social Security, Medicare and other entitlements.

From this it looks like tax hikes (and tax reform) are less likely. It’s seems it’s just a matter of how much to cut and where but Bill Gross’ prediction that most cuts will be fiction and swamped by lower revenues is already ringing true.

What is also becoming increasingly clear is that this will not be a long-term solution. At best the ceiling will be raised until slightly beyond the 2012 election with very little meaningful reform to entitlements or a credible plan toward a sustainable debt load. This sounds to us like precisely the type of outcome that WILL RESULT IN A DOWNGRADE. If such a deal is announced, we don’t expect a downgrade immediately but it will not be advisable to hold USD because a downgrade could be announced at any time. We will have more about the impacts of a downgrade and potential trades in the days ahead.

The dollar would like have fallen farther but the idea that AUG. 2 ISN’T THE REAL DEADLINE as taken hold. S&P said the Treasury can stretch out the process beyond Aug. 11. Others say as long as Aug. 15.

Obama is scheduled to speak at 9 p.m. ET (1 a.m. GMT). The chief risk we see here is that Obama abandons his demand that the higher ceiling runs through the 2012 elections. This would probably pave the way for the outline of a deal sometime in the subsequent 48 hours.

Outside of the huge moves in CHF on Monday the forex market was tame. JPY and CAD were mild outperformers with GBP lagging. Gold gapped $14 higher at the open, ran as high as $1621 and closed at $1614. The S&P 500 fell 0.6% to 1337.

More on the Swiss Franc Rally

USD/CHF fell as low as 0.8020 on Monday while EUR/CHF remains about 180 pips above the record low of 1.1404.

The reasons for the CHF move: 1) Over the past several weeks some large operations shifted into USD/CHF longs. They were likely stopped out. 2) Technical selling on the break below the record low of 0.8081. 3) The market is pricing in a US downgrade and when the headline hits, the place you want to be is short USD/CHF.

The collision of these three factors today caused an outsized gain in CHF. To us, this move looks like it has gone too far, too fast. Momentum indicators are stretched and consolidation looks more likely in the next few days than declines below 80.00 – especially with the risk of a debt deal.