The Swiss Franc was the strongest major currency in the overnight, posting its largest moves against the New Zealand Dollar and the U.S. Dollar, as markets had a notable shift in risk-seeking behavior, shying away from higher yielding assets while simultaneously showing caution against the Greenback amid stalled debt negotiations. The U.S. Dollar’s demise in the Asian and European sessions comes as a bit of a surprise, considering it appeared President Barack Obama was ready to sign off on a deficit-cutting plan endorsed by a bipartisan committee, news that sent the Dollar higher yesterday.
However, ahead of Wednesday’s Asian trade open, any short-term confidence instilled in the world’s reserve currency was immediately siphoned away by an announcement by Speaker of the House, Republican John Boehner, that the “Gang of Six” plan, the bipartisan plan that President Obama appeared ready to agree to, “appear[ed] to fall short in some important areas.” As Republicans in Congress continue to push for an amendment to the constitution that would place a cap on government debt, Secretary of the Treasury Tim Geithner released an op-ed in the Wall Street Journal, notably ending with the following declaration: “As secretary of the Treasury, I will recommend that the president veto any legislation passed by Congress that would undermine these vital financial protections.”
Dollar-Franc 5-minute Chart: July 20, 2011
Charts created using Strategy Trader– Prepared by Christopher Vecchio
As such, on continued uncertainty on whether or not the U.S. government will be able to find an amicable middle-ground for both sides, the Swiss Franc retook the mantle as the reserve currency du jour, and after two days of depreciation against the U.S. Dollar, the Franc appears ready to continue back down in a steep descending channel that has been in place for the better part of the past year.
In other news from the overnight, the Bank of England released the details from its July meeting, which offered an all-but uncertain view on the direction of the Sterling in the coming weeks and months. The minutes, while showing that two of the nine Monetary Policy Committee members voted to raise the benchmark interest rate, indicated that expectations for tightening the ultra-loose monetary policy have fallen as inflationary pressures have tailed off.
British Pound Basis-Points Priced In (12-months): April 2011 to Present
The falling rate hike expectations, as noted by the chart above, are particularly important for forecasting currency fluctuations, as a widening spread between two currencies implicitly suggests that a given currency pair will appreciate or depreciate. As with the British Pound, now that the number of basis points priced into the pair have continuously fallen since April, any hawkish commentary by other central banks, like the Bank of Canada yesterday, could lead to a further depreciation of the Sterling against other major currencies.
On the day thus far, the Dow Jones FXCM Dollar Index continued its decline, falling from a session open of 9575.28, to as far as 9543.71, at approximately 10:50 GMT. While the index traded as high as 9588.41, the index remained under pressure at the time this report was written, trading at 9566.97. The index has recovered, to an extent, over the past few hours, despite commentary from various European Union officials pledging to avoid a selective default from Greece. Indeed, as Fitch Ratings agency noted that a “disorderly” Greek default would lead to “severe volatility,” and the contagion risks posed from such a default would be “material.”
• Obama Embraces Senators’ Deficit-Cutting Plan – Bloomberg
• U.S. Stock-Index Futures Gain on Apple – Bloomberg
• Brussels Unveils Tough Bank Capital Rules – Financial Times
• Merkel and Sarkozy Seek 11th-Hour Deal – Financial Times
• China Urges U.S. to Boost Confidence in Debt, Dollar – Reuters
USDCHF: The USD/CHF pair remained under pressure on the day, falling to a near-session low of 0.8198 at the time this report was written, as risk-appetite was clearly tapering off headed into the North American trade on continued uncertainty surrounding the American and European debt crises. Until resolution is definitively reached for the crises, the Swiss Franc is likely to remain one of the strongest major currencies.
Taking a look at price action, while the USD/CHF pair is long overdue for a sharp rebound to the upside, the fundamental backdrop remains significantly stronger than the technical picture. The pair’s daily RSI has started to fall again, after briefly hovering in oversold territory late last week, now at 38. Similarly, the MACD Histogram remains in a bearish divergence, at -10, while the Slow Stochastic oscillator, bucking the trend, is suggesting further gains, with the %K greater than the %D, at 34 and 26, respectively. The technical outlook for Franc-crosses remains essentially insignificant as markets have deemed the Franc as the reserve currency amid crises in Europe and the United States.
Written by Christopher Vecchio, Currency Analyst
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