Friday, July 15, 2011

The debt ceiling imperiled the U.S.'s AAA rating

Previous session overview

An uptick in core U.S. prices in June lifted the dollar modestly Friday, as investors speculated that rising inflation could minimize the prospect of a third round of monetary stimulus from the Federal Reserve. 

Fiscal concerns remained a drag on the U.S. currency. Analysts mulled Thursday's surprise announcement by Standard & Poor's, which warned that the protracted negotiations over the debt ceiling imperiled the U.S.'s AAA rating. S&P added that the world's largest economy is confronting a 50% chance of being downgraded within the next few months. 

The euro treaded a tight range to hover near USD1.4121 in early U.S. dealings, slightly lower than Thursday's closing levels. The dollar bought JPY79.20, marginally higher than its prior close. The greenback firmed against the pound to trade near USD1.6112, and gained against the Swiss franc to CHF 0.8188. 

A near-term risk was the publication of European bank stress-test results, due out around noon New York time. Speculation is rife that a significant portion of banks may not have adequate capital to withstand a financial shock. 

That made investors especially nervous, as a potential Greek debt default could unleash a contagion that could expose banks to billions in losses if they don't have sufficient capital. 

The Canadian dollar ceded overnight gains early Friday after U.S. consumer inflation numbers suggested prices were still tame, and as local factory significantly lagged estimates.

The U.S. dollar gained to CAD0.9595 from CAD0.9580 before the data. The greenback closed at CAD0.9606 Thursday. The U.S. Consumer Price Index comes at a time when investors and analysts are keenly watching data to figure out if economic growth rates will recover in the second half of the year, after having slowed in the first half due to temporary factors. Canadian manufacturing data added to the gloom as falling sales fell four times more than expected in May.

Market expectation

For EURUSD on the downside, the pair might find support at USD1.4095 (day low), and below here, USD1.4035 (intra-day level) and USD1.3950 (intra-day level). On the upside resistance levels lie at USD1.4200 (day high), and above here, USD1.4280 (Jul 14 high), and above here, USD1.4370/75 (Jul 7/8 highs).

USDCHF remains bearish while below CHF0.8200, according to technical analysts. The broader bearish outlook remains intact and while below CHF0.8200, we see good chance of testing CHF0.8050-00 on the downside.

Above CHF0.8200, at CHF0.8250/00, analysts observe a good entry point for shorts. A strong break above CHF0.8200, if seen might take the pair up towards CHF0.8250-8300. This CHF0.8250-8300 is a very strong Resistance region and an immediate break above this Resistance region is not looking likely.