Monday, August 8, 2011

U.S. Downgrade & ECB's Emergency Meeting

Previous session overview
The dollar fell against its major counterparts in Asia Monday following Standard & Poor's downgrade of the U.S. credit rating, but gained some support against the euro after the European Central Bank decided to resume government bond purchases. 

Foreign exchange trading was subdued as investors continued to work out the implications of S&P's move to cut the U.S. to AA+ from AAA. Much of the early focus was on the ECB's emergency meeting, with traders expressing disappointment that policy makers didn't spell out intentions to buy bonds from heavily indebted Spain and Italy. 

Asian share markets and oil prices fell, while gold rose on mounting safe-haven demand. The move away from riskier investments hurt commodity-linked currencies like the Australian dollar and the risk-sensitive euro against the yen. The yen benefits as a safe haven, despite Japan's own fiscal problems, due to Japan's still large current account surplus. Official data Monday showed the surplus was at JPY526.9 billion in June despite falling 50.2% from the same period a year earlier due to the continued effects of the March 11 earthquake and tsunami. 

At 0450 GMT, dollar was at JPY77.99, down from JPY78.48 late Friday in New York. The euro was at JPY111.62 from JPY112.01, although the common currency gained against the greenback, at USD1.4310 from USD1.4280.

The ICE Dollar Index, which measures the U.S. currency against a basket of other currencies, including the euro and the yen, was at 74.378 from 74.549. 

Commodity-linked currencies like the Australian dollar tumbled Monday, with the trading at USD1.0329 from USD1.0447 late Friday. But analysts said strong capital inflows in pursuit of Australia's high yielding; AAA-rated government bonds should support the Australian dollar going forward.
Market expectation
Analysts were divided on the immediate impact of the S&P move on the dollar. While the downgrade appears negative overall for the greenback, many said major holders of Treasurys have little alternative.

Dealers say that although the EURCHF could consolidate in the near term, they note that the market hasn't overcome the first level of resistance. As a consequence there is scope for a deeper selloff to CHF1.0550.

The USDCHF has no other support until CHF0.7410 after selling off beyond the CHF0.7554/0.7550 support line and charting a new low of CHF0.7480, say dealers. They say rallies will find initial resistance at CHF0.7725, but will need to overcome the accelerated downtrend at CHF0.7944 to alleviate immediate downward pressure and signal a recovery to the six-month downtrend at 0.8285. Dealers recommend squaring trades, attempting tiny shorts on a rebound to CHF0.7725. Add CHF0.7825, stops over CHf0.7945, and cover CHF0.7410.

European stocks markets are expected to slide at the open Monday, after Standard & Poor's historic downgrade of U.S. government debt triggered fresh concerns about the outlook for the world's largest economy.