The Swiss Franc found robust strength in the Asian and European sessions as investors sought safe haven amid the Moody’s downgrade of Greece as well as developing concerns that U.S. government might default on its debt. The Franc moved back towards its record high against the Euro, with the pair falling as low as 1.1530 in pre-North American trade. The all-time low was set last Monday, at 1.1369.

Moody’s Investors Service noted in a report released at approximately 5:00 GMT that the support package for Greece announced last week’s summit “benefits all euro area sovereigns by containing the contagion risk that would likely have followed a disorderly payment default on existing Greek debt.” The report also noted that “the credit implications of the announcement for creditors of individual countries depend on the balance of the positive market-stabilising elements of the plan and the negative precedent set by the endorsement of distressed exchanges between Greek creditors and the sovereign.”

Euro-Franc 5-minute Chart: July 25, 2011

Swiss_Franc_Soars_on_Greece_Downgrade_Uncertainty_Over_U.S._Debt_Deal_body_Picture_1.png, Swiss Franc Soars on Greece Downgrade, Uncertainty Over U.S. Debt Deal

Charts created using Strategy Trader– Prepared by Christopher Vecchio

In a further dissection, Moody’s made the following notations about the downgrade, which are particularly relevant given the health of the global financial system:

  • The support package incorporates the participation of private sector holders of Greek debt, who are now virtually certain to incur credit losses. If and when the debt exchanges occur, Moody's would define this as a default by the Greek government on its public debt.
  • Accordingly, Moody's has today downgraded Greece's debt ratings from Caa1 to Ca to reflect the expected loss implied by the proposed debt exchanges. Once the distressed exchange has been completed, Moody's will reassess Greece's rating to ensure that it reflects the risk associated with the country's new credit profile, including the potential for further debt restructurings. While the rating agency believes that the overall package carries a number of benefits for Greece -- a slightly reduced debt trajectory, lower debt-servicing costs, as well as reduced reliance on financial markets for years to come -- the impact on Greece's debt burden is limited.

In terms of performance against the other major currencies, the Swiss Franc also found particular strength against the U.S. Dollar and the commodity currencies, as market participants, as they continue to digest the Euro-zone bailout package for Greece, are finding it difficult to muster the courage for risk-appetite. As U.S. lawmakers bicker over the finer details of a plan that would raise the debt ceiling, cut spending and raise revenues (or anything combination of the three), it’s becoming obvious that the markets will become increasingly jittery in the days ahead before a debt deal is struck. As such, the Franc, as well as other safe havens, such as Gold, which rose to an all-time high of 1624.30 in the overnight, is likely to find additional support in Dollar terms so long as uncertainty remains ahead of August 2.

On the day thus far, the Dow Jones FXCM Dollar Index has traded in a choppy, approximate 30 point range, as high as 9476.10 and as low as 9444.46. The index was particularly weak last week, as concerns over the U.S. debt ceiling weighed on the U.S. Dollar. As long as concerns linger, the index will likely face continued downside pressure.

Swiss_Franc_Soars_on_Greece_Downgrade_Uncertainty_Over_U.S._Debt_Deal_body_Picture_4.png, Swiss Franc Soars on Greece Downgrade, Uncertainty Over U.S. Debt DealSwiss_Franc_Soars_on_Greece_Downgrade_Uncertainty_Over_U.S._Debt_Deal_body_Picture_5.png, Swiss Franc Soars on Greece Downgrade, Uncertainty Over U.S. Debt Deal

Swiss_Franc_Soars_on_Greece_Downgrade_Uncertainty_Over_U.S._Debt_Deal_body_Picture_6.png, Swiss Franc Soars on Greece Downgrade, Uncertainty Over U.S. Debt Deal

Fundamental Headlines

Last Minute ‘Gang of Six’ Plan Derails Boehner Debt-Limit Deal with Obama – Bloomberg

U.S. Stock Futures Down on Lack of Debt Deal – Bloomberg

Debt-Talk Drama Puts Market on the Defensive – CNBC

Money Market Funds Cut Euro Bank Exposure – Financial Times

Moody’s Warns Greek Default Almost Certain – Reuters

EURUSD: The EUR/USD pair, unlike the EUR/CHF pair, was relatively unchanged, down 0.06 percent at the time this report was written (the EUR/CHF pair depreciated 1.93 percent in the overnight). The pair could face significant downside pressure once the U.S. debt crisis is resolved, as confidence in the world’s reserve currency is renewed. For now, as contagion is contained in Europe, the Euro could find some support in the near-term, although the recent bailout package appears to be an expansion of the European Financial Stability Facility (EFSF), making it a mirror image of the United States’ Troubled Asset Relief Program (TARP), which could ultimately result in a depreciation of the currency bloc.

Taking a look at price action, the pair broke through its key pivot today, at 1.4369, and although the daily chart suggests a sideways trade in the near-term, shorter-term timeframes suggest that the pair may have, in fact, topped in the near-term. On the 8-hour chart, the RSI has fallen to 58, from 68 on Thursday. Similarly, the MACD Histogram appears to have peaked in its bullish divergence, with the differential narrowing to +18 from +39 on Friday. The Slow Stochastic oscillator has issued a sell signal, however, with the %K less than the %D, at 82 and 83, respectively. Should the pair break below 1.4330, the path looks clear to at least 1.4150.

Written by Christopher Vecchio, Currency Analyst

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