Though analysts view the downgrade of US debt by S&P’s ratings agency from AAA to AA+ as overall bearish for the USD, a sharp downturn was held in check Monday morning by a continued purchase of bonds by European investors. Another view states that although the rating may reduce the foreign purchase of Treasury notes over time, those investing in such assets have little alternative at the moment which could match the US bills’ implicit and explicit values.
Economic News
USD – Historic Downgrade by S&P Being Digested by Traders
The US dollar (USD) was seen trading only mildly bearish Monday morning as traders began digesting what impact S&P’s historic downgrade of the US credit rating will have on financial markets. The downgrade from AAA to AA+ was seen as a response to political deadlock in Congress over the nation’s debt, and a view that both political parties were expressing unwillingness to compromise in order to effectively handle the nation’s financial crisis.
Though analysts view the downgrade as overall bearish for the USD, a sharp downturn was held in check by a continued purchase of bonds by European investors. Another view states that although the rating may reduce the foreign purchase of Treasury notes over time, those investing in such assets have little alternative at the moment which could match the US bills’ implicit and explicit values.
As for today, no significant news will hit the economic calendar officially, but emergency sessions of the G7 industrialized nations and central banks worldwide may generate wide shifts in today’s market, and possibly without warning. Statements from world leaders regarding the S&P downgrade, as well as financial turmoil in Europe over Italy and Spain will likely be released today and throughout the week, causing portfolio shifts that traders will want to be on guard against.
EUR – EUR Mixed as Traders Await US Update
The euro (EUR) was seen trading with mixed results this morning following news of a downgrade of US debt by S&P’s ratings agency. Against the US dollar (USD) the euro was trading somewhat bullish in early morning hours Monday as the greenback moved bearish against all currency rivals. The euro, however, does not appear in a position to capitalize on the gains being seen elsewhere.
Traders are looking for a way to balance a renewal of risk appetite with continued shakiness in global markets. A weakly optimistic sentiment towards investing in the US dollar at the moment, due to the S&P downgrade, has many investors on edge. An embattled euro zone, fending off market bears amid turmoil in its peripheral nations, also looks to be losing ground in financial markets as safe haven assets such as the Swiss franc (CHF) and Japanese yen (JPY) make gains.
Sentiment across the euro zone has turned negative, with many analysts and economists expecting moves towards safety by traders this week. Any more bearishly-leaning news out of any major global economy will likely pull down on the EUR even further as investors flee risk, despite a moderate sentiment of euro favoring sentiment this morning due to the flight from the US dollar.
AUD – AUD Sees Bearishness as Commodity Futures Tumble
The Australian dollar (AUD) was seen trading moderately lower versus most other currencies this morning after the S&P downgrade of US debt created a selloff in commodity futures. Being linked to the value of commodities, the Aussie experienced an unexpected downturn during a period when shifts away from the US dollar should have helped drive its values higher. The Aussie has been experiencing several wide swings lately from the various shifts into and away from riskier assets, which could explain the erratic behavior of this morning.
The latest moves have helped to push down on the AUD as traders pulled away from commodity-linked assets as a result of the plummeting Dow Jones index. Data from this morning also showed job advertisements in Australia plummeting 0.7%. Coupled with pessimistic housing data last week, the Australian economy appears to be contracting this quarter. If that is indeed the case, the Aussie will likely continue to take losses this week despite a move away from the US dollar.
Gold – Gold Price Decreasing Monday Morning
The price of Gold met resistance over the past week despite the plummeting strength of the US dollar, the currency in which such assets are valued. Gold has been trading with rather mild price action since June, but traders have been awaiting price resurgence due to the rampant increase in risk aversion due to rising tensions from Italy and Spain and a recent downgrade of US debt by S&P’s ratings agency.
As investors seek safety, the value of gold, which has been seen trading with mixed results, was expected to rise, but a selloff in commodity futures pulled down on precious metals Monday morning. A sudden flop in dollar values due to this week’s uncertain environment is expected to do little to suppress this price movement. Should risk sentiment continue to bounce in sporadic directions this week, the price for this precious metal may continue to experience similar swings in value.
Technical News
EUR/USD
An opening gap higher on Monday morning took the pair above its current downward sloping channel that contained the EUR/USD since late July. Selling into EUR/USD gains may be the right play as the pair has been unable to hold a bid above the 1.45 level. Initial resistance comes in at 1.4540 though a break above the June high of 1.4700 would likely reverse the negative technical tone. To the downside support comes in initially at last Friday’s low of 1.4050 followed by the 200-day moving average at 1.3940 and the rising trend line from June 2010 which comes in at 1.3840.
GBP/USD
Cable looks to be supported after moving lower and receiving a bounce at 1.6220. This level holds the 55-day moving average and a 38% retracement from the mid- July low to the late July high. Resistance is found at 1.6475 followed by 1.6550. A break here and sterling could test the April high of 1.6750. 1.6220 is initial support followed by the 200-day moving average at 1.6085, 1.6000, and the July low of 1.5780.
USD/JPY
The spike higher in the value of the USD/JPY due to Japanese government intervention was short lived as the 80 yen level was eagerly sold into. The pair has retraced 68% of its move from the August low to the post intervention high and may continue to move lower. A previously broken trend line from the late July move lower may be supportive but most likely only a short term pit stop on the way back to the all-time low at 76.25. Resistance is found at 79.50 and the post intervention high of 80.22. An additional round of FX intervention could take the pair to the long term trend line off of the 2007 high which comes in at 82.00.
USD/CHF
Even measures undertaken by the Swiss National Bank to weaken the Swiss franc have failed to give the USD/CHF a bid. On Monday morning the pair gapped lower to a new all-time low. Momentum is steadily falling and traders may want to continue to hold their shorts. Initial resistance stands at 0.7800 followed by 0.8080 and the downward sloping trend line from the February low at 0.8270.
The Wild Card
Gold
This morning spot gold prices gapped higher above the psychological $1,700 price level. With risk sentiment considerably lower in the global markets forex traders could be long spot gold with the next resistance at the $1,800 level.
Forex Market Analysis provided by ForexYard.
© 2006 by FxYard Ltd
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