Daily market report U.S. Outlook Revised by Moody’s to Stable on Deficit Reduction, Dollar may struggle to strengthen further - Euro Unable to Overtake 1.3200 Despite Portugal’s GDP Call - British Pound Extends Climb, GDP Outlook May Force 1.5250 The U.S.’s Aaa credit-rating outlook was revised to stable from negative by Moody’s Investors Service, which said the government’s debt trajectory has steadied with budget deficits narrowing. Growth in the economy, “while moderate,” is proceeding even as the U.S. has enacted tax increases and spending reductions, the New York-based company said yesterday in a statement. Moody’s assigned the negative outlook in August 2011, warning that it may downgrade the U.S. for the first time on concern fiscal discipline was eroding and the economy was weakening. Both the dollar and capital markets are exceptionally sensitive to stimulus. If the it is seen receding, it could set off a reversal in capital markets pumped up by moral hazard. Should the ‘Taper’ be pushed back, it could cripple the recent dollar run against the prevailing risk trend. Yet, in his second day of testimony Fed Chairman Ben Bernanke deftly avoided trigger words to set off Taper speculation. A currency that rises through poor data and event risk is a strong currency. That is a condition we have come to familiarize ourselves with over recent months and years as central banks have promoted moral hazard and skewed natural swings in sentiment. For the euro, however, this anesthetized sense towards lingering financial risks in either periphery (Portugal, Greece) or core (France, Italy) members has evolved out of necessity. A constant risk of a Greece default without the actual fallout will do that to a nerve-wracked investor. Yet, this past session actually seemed to bring positive news for the shared currency. France managed to sell debt at a notably cheaper level and to higher demand despite last week’s rating downgrade. The ECB announced that it was lowering its collateral thresholds in an effort to boost lending. Most important of all though, Portuguese Prime Minister Coelho suggested the country may have grown in Q2. The recent rebound for GBP/USD from 1.4850 is looking very much like a repeat of what was seen back in March following a 1,500 pip tumble through the open of the year. The progress from the previous turn was rather choppy as there wasn’t a clear call on whether economic stagnation would usher in a more dovish monetary policy response after the BoE change over. Well, this time around we have already seen the triple dip recession avoided, data has continued to improve the past few months and the release of the minutes from the last policy decision have shown that there is even less of a call for open-ended stimulus now than there was six months ago. With 2Q GDP figures due next week, we may find a catalyst to spur forward an already germinating fundamental shift in expectations. Looking ahead, once again Euro-Zone macro data is on the light side with just German PPI, Italian industrial orders and ECB LTRO repayments due out while in the UK June public finances are also due for release. Otherwise, we get more key earnings from the US, Italy’s no-confidence vote and G20 finance ministers and central bank governors meet in Russia. Have a good day!
Posted on: Fri, 19 Jul 2013 10:31:35 +0000
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