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- US “Gang of Six” Budget Plan Rallies Investor Risk-Taking
- Canadian Wholesale Sales Up in June
- Australian Leading Index Declined in May
- Dollar Weakens, BOE Minutes More Dovish
| US “Gang of Six” Budget Plan Rallies Investor Risk-Taking Posted: 20 Jul 2011 07:13 AM PDT
As the deadline to lift America's debt ceiling approaches, a group of six US senators have stepped forward with a last-ditch plan to tackle the country's budget crisis. The behavior of financial and capital markets over the past few weeks have been roiled by massive shifts into safe-haven assets as investors fled risk. Recent market behavior, however, indicates a shift back to normalcy. The bipartisan "Gang of Six" plan is to reduce the budget deficit by $4 trillion over the next ten years, including a tax increase that would raise $1 trillion in new revenues over the same period by closing several loopholes in the American tax system. The passage of such a deal depends largely on whether the GOP will accept the tax hikes included. It has long been assumed that Congress would not allow the US government to default on its loan payments, but as the deadline inched near both parties became piqued at the other's unwillingness to compromise. The resultant deadlock has riddled global markets with added uncertainty. This week, however, what we see is the price of oil moving higher while gold and silver enter a price decline; the US dollar is paring gains as investors opt for the euro; and Asian, American and European stocks are edging higher. These are all signs that investors are expanding their economic outlook and adjusting their portfolios to take on more risk following the economic data surrounding the US housing market, high earnings reports from several large companies, as well as optimism that the "Gang of Six" proposal stands the best chance yet of being accepted and passed. This in no way guarantees that the "Gang of Six" proposal will pass, only that investors view it as a solid starting point for resolving the budget crisis. A recent Republican plan to amend the US Constitution in a way that would have required the government to have a balanced budget failed to pass by the needed majority, and it will be interesting to see how the backlash from that failed initiative plays into the negotiations over this latest proposal. |
| Canadian Wholesale Sales Up in June Posted: 20 Jul 2011 07:10 AM PDT
A report from Statistics Canada this morning highlighted a growth in wholesale sales across the northern giant. The Canadian dollar (CAD) has been experiencing wide swings in value from shifts in risk aversion and spasmodic commodity price action these past few trading days. News of high growth in Canada's housing market has helped lift the value of the Loonie in recent trading, and this bullish sales figure should lend more weight to a region bereft of market optimism. Expectations were for mild growth of 0.2%, but today's 1.9% reading has, and should, push the CAD a smidge higher in today's afternoon session, particularly is US housing data can remain as bullish as it has been this week. |
| Australian Leading Index Declined in May Posted: 20 Jul 2011 07:08 AM PDT
The Melbourne Institute's (MI) measurement of Australia's Leading Index, a composite index of nine economic indicators, revealed a contraction of approximately 0.1% occurred in the month of May. The indicator tends to have little impact on currency values given the delay of the data release – the report is published about 50 days after the month ends. Nevertheless, news that a composite collection of major indicators have declined does not bode well for a global market rife with economic pessimism that appears to be growing by the day. So far traders have seen the Australian dollar (AUD) sell off a bit in today's trading on the news of this contraction. |
| Dollar Weakens, BOE Minutes More Dovish Posted: 20 Jul 2011 05:07 AM PDT
Sterling was up versus the dollar but weaker in the crosses as the BOE meeting minutes showed a reluctance to tighten interest rates given weakness in UK growth prospects and headwinds in the global economy. Rising expectations for solutions to debt issues on both sides of the pond are spurring equity gains and dollar weakness, though the major currencies remain in their weekly ranges prior to tomorrow's EU summit. The dollar is weaker as market sentiment is improving. Prospects of a deal in the US debt talks are making headway as the Gang of six proposal may be enough to stitch together a short term solution while pushing the larger budgetary debates further down the road until after the 2012 election. Equities have continued to perform well after yesterday's 1.6% rally in the Dow. European equities have followed US indices higher with the FTSE up 1% while gold is off of its all-time high. A day before the European summit Sarozky and Merkel are meeting in Berlin to hash out their differences. Tomorrow's meeting will likely address an additional Greek bailout package with involvement from the private sector, something Merkel has been adamant about. This is in stark contrast with the ECB which insists on any private sector participation avoiding a credit event as defined by the rating agencies. A substantial new package released following the EU summit would likely be supportive of the euro. One such package is rumored to allow the EFSF begin purchasing sovereign debt or loaning funds to Greece to buy back their own bonds. Any solution will need to be scalable to other EU nations to prevent further contagion as was seen the previous week with yields on Spanish and Italian debt climbing. Initial resistance for the EUR/USD remains last week's high/100-day moving average near 1.4300. Sterling is up versus the dollar but lower in the crosses as the BOE signaled the current economic weakness is expected to be prolonged and will prevent the central bank from raising UK interest rates in the near term. Despite expectations of increased headline inflation, wages are not putting upward pressure on prices and thus will allow the BOE to maintain its loose monetary policy going forward. This will likely keep sterling pressured versus the euro but dollar weakness could temper any losses in cable. EUR/GBP resistance is found at 0.8850 followed by the July 1st high of 0.9080. Cable has resistance at 1.6220 from the pattern forming since late April and support at last week's lows of 1.5780, a level that coincides with a 38.2% Fib retracement of the April 2010 to April 2011 move. Read more forex trading news on our forex blog. |
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