The news over the weekend of the downgrade of the US from AAA to AA+ by Standard and Poor’s really oughtn’t have been too much of a surprise, given they flagged it up a while ago on the 14th July. It certainly overshadowed the news about the better than expected US payrolls report, which while encouraging, won’t have assuaged any fears about a slowdown in the US economy. Equity markets in Asia have tumbled with Europe set to follow suit.
Putting the usual "shoot the messenger" knee jerk reactions of US policymakers to one side for one moment, the general feeling it was probably long overdue, however the big surprise was the fact that S&P kept the US on negative watch, suggesting that another downgrade could happen in the next 18 months. S&P cited the recent debt ceiling shenanigans as part of its reasoning as well as the low level if spending cuts. Friday’s action will now inevitably shift the focus onto Fitch and Moody’s ratings.
The effect on the US dollar isn\'t likely to alter that much as it’s been on a downward trend for quite some time now, especially against the Swiss franc and the yen and that isn\'t likely to change with further losses seen as likely.
The Swiss franc hit new record highs in Asia overnight despite Swiss National Bank governor Hildebrand calling the current level of the franc “absurd” on Friday. The recent actions of the SNB could well make further strength more likely, and not less in that in cutting rates to zero, the Swiss can now be seen as a funding currency for the carry trade, in the same way the yen has been used in recent years.
S&P’s decision certainly makes this week\'s FOMC meeting much more interesting with respect to the Fed\'s reaction to the downgrade, and whether or not they once again downgrade their outlook for the US economy.
In Europe the ECB issued a statement last night that it would actively re-implement its Securities Markets Program (SMP) in response to the announcements made by the governments of Italy and Spain over the weekend concerning bringing forward new measures as well as reforms in fiscal and structural policy. The council also noted the “declaration of the Heads of State or Government of the euro area in the inflexible determination to fully honour their own individual sovereign signature as a key element in ensuring financial stability in the euro area as a whole.”
This could well create problems going forward as the ECB ups its exposure to peripheral debt, thus exposing any new potentially expanded EFSF to more liabilities, which in turn could then see France’s finances come under close scrutiny, as their contribution to the fund would then become much larger.
Gold prices continue to rise hitting record highs above $1,700 an ounce.
EURUSD – the single currency blew through the 55 and 100 day MA’s between 1.4320 and 1.4345 in Asia in the wake of the S&P downgrade, and could well spill over towards this month’s high at 1.4450. The major resistance remains around the July highs at 1.4575/80.
The bias continues to remain for a move lower whilst in the 1.4000/1.4500 range of the past few weeks; however the support just above the 200 week MA at 1.4030 remains a tough nut to crack.
GBPUSD – whatever the market throws at it the pound seems to be able to hold above the 1.6250/60 support area. The market seems to be trading in a range for now between 1.6240 and 1.6500. The 1.6250 level remains a key support area.
If the pound is able to sustain a move below 1.6250/60 then we could well get a move back towards 1.6180/1.6200 which acted as strong resistance for most of mid July. Only a move below 1.6180 retargets the 1.6080 pivot.
EURGBP – the single currency continues to fall pushing through the 0.8700 before finding some support on its 200 day MA around 0.8660.
A close below the 200 day MA has the potential to retarget the May lows at 0.8610 and ultimately the trend line support at 0.8540 from the 2010 lows at 0.8065. Rallies could run into trend line resistance at 0.8775, from the 0.9085 highs in June. Beyond that the larger resistance remains at 0.8830.
USDJPY – last week s intervention certainly cleared out some short positions, but it hasn’t changed the overall down trend after the failure to close above the 79.50/60 area, despite an overspill to 80.25.
Unless we see further intervention we could well see a further drift back down towards the major support at the twin lows at 76.25. It still needs a move through and close above the 79.50/60 area to really kick on and push through the 80 level and 55 day MA towards the trend line resistance at the 81.00 level.