The United States might have barely achieved a passing grade in end of semester exams, but remains a naughty schoolboy, disrupting the classroom and showing few if any signs of wanting to give up on a privileged lifestyle. Moody's Investor Services says the United States is still at risk of losing its top credit rating despite the debt-ceiling extension. The dollar index fell following the warning despite earlier affirmation that Moody's would leave alone the nation's AAA-rating, in place since 1917. Tensions within the currency market spilled over forcing the Swiss to flood the market with liquidity sending its franc tumbling from the heights of the Matterhorn.
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U.S. Dollar – The dollar also weakened after investors stumbled over surging bond prices as economic weakness caused panicked stock sales and created echoes of the recently closed-chapter of quantitative easing. Declining bond yields are a harbinger of a third wave of easing as risks to global growth keep washing ashore. The private ADP employment report showed an increase in new hires by 114,000 in July. In its June report, ADP shocked investors with news of an increase of 157,000 and more than 120,000 above market consensus. Looking back one month shows how that news caused a painful suckers' rally just before an official reading showed the weakest pace of jobs growth in four years. Yet at the time the ADP report lifted the S&P to a two-month high and within a whisker of a three-year peak. The dollar index recently traded at 74.10 after the reading for a loss of 0.5% on the day.
Euro – The real story within the Eurozone today belongs to the Swiss National Bank who unleashed a torrent of liquidity on the money markets aimed at curbing what it calls a “massive overvaluation” of its franc. The Swiss franc has rallied over the recent quarters as just about the sole European alternative to the 17-nation single currency unit whose weaker deficit-ridden nations have raised angst for the euro. The Swiss National Bank last intervened by selling the Swiss franc in 2009 when the recession was it its peak. The pressure on the franc was only temporarily relieved causing the central bank to abandon its harnessing efforts later claiming that the recovering economy could now withstand such appreciation. On Wednesday the SNB said it aimed to cut the three-month Libor rate from 0.25% to “as close to zero as possible”, while it more than doubled the sight deposits or cash available for immediate withdrawal from Sfr30 billion to Sfr80 billion. The euro surged from a record low at Sfr1.0795 to buy Sfr1.1100 following the effort. The reprieve also allowed the euro to rebound by 1% to the dollar where it recently reached a session peak at $1.4343.
British pound – But trading in the European currencies was also boosted by a series of improvements in service sector readings according to the suite of PMI data on Wednesday. While manufacturing data recently sagged, the service sector is a more important key for most of the developed world. The pound vaulted from within a penny of its lowest in two-weeks against the dollar after the PMI manufacturing reading unexpectedly signaled a faster than forecast expansion within the sector during July. The PMI index of 55.4 marked an unusual jump in activity from the June reading of 53.9 especially in light of other anemic domestic data. The pound nevertheless jumped several hurdles en-route to its session peak of $1.6404.
Aussie dollar – The AiG performance of services in Australia also improved for July but at a reading of 48.8 merely signals lesser contraction than during June. The Aussie swooned following the third decline for retail sales in four months proving a worrisome trend for the central bank concerned by external risks to growth, elevated domestic inflation and a fragile picture of activity outside the rambunctious mining sector. The local currency fell beneath a two-week low reaching $1.0712 before eradicating losses as U.S. stock index futures signaled a rebound. The Aussie was also comforted by a rise in the official Chinese take on the service sector, which rebounded from 57.0 to 59.6. However, the HSBC version indicated further cooling from its June reading of 54.1 to 53.5 last month. The Aussie slipped versus the yen to ¥82.93.
Japanese yen – The Bank of Japan began a two-day meeting and is likely to announce further measures aimed at easing monetary policy on Thursday. Finance Minister Noda warned that any currency intervention would be designed to take “maximum effect”, which possibly hints that when we wake up on Thursday we’ll have heard new measures from Tokyo and seen yen sales. The yen reached ¥76.99 versus the dollar remaining close to there in New York. If the Bank of Japan does step in to restrain the value of the yen, it will become the third central bank this week to do so following similar moves from those of Brazil and Switzerland.
Canadian dollar – A rebound for risk appetite helped distract dealers from targeting commodity sensitive currencies. In a sense the raging fiscal health of the Canadian government has desensitized the currency from the wild swings in risk sentiment over the course of the year. Even though the Canadian economy remains reliant on activity in the world’s leading economy, its currency is becoming something of a safe haven status in its own right. On Wednesday the local dollar advanced to buy $1.0427 U.S. cents.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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