The Dollar fell to a record low against the Euro and a 26-year low against Sterling on Tuesday as investors feared that the deteriorating US sub-prime mortgage market could eventually slow the economy. The Dollar’s broad decline was relentless late into the day and was steepest against the Yen and Swiss francs, low-yielding currencies that benefited as investors cut back on their exposure to riskier, higher-yielding assets.
The sell-off was sparked by a report from credit rating agency Standard & Poor’s that it may downgrade $12.1B in sub-prime-related dept.
News and Events:
The Dollar fell to a record low against the Euro and a 26-year low against Sterling on Tuesday as investors feared that the deteriorating US sub-prime mortgage market could eventually slow the economy. The Dollar’s broad decline was relentless late into the day and was steepest against the Yen and Swiss francs, low-yielding currencies that benefited as investors cut back on their exposure to riskier, higher-yielding assets.
The sell-off was sparked by a report from credit rating agency Standard & Poor’s that it may downgrade $12.1B in sub-prime-related dept.
EurUsd rose as high as 1.3784, a record high, before ending the day near the highs at 1.3744 up 0.89%. GbpUsd climbed 0.56% to 2.0268, having hit 2.0284 the highest in 26 years. UsdJpy fell to a one-month low to 121.72 -1.31%, its biggest decline since mid-March. UsdChf weakened -1.09% to a two-month low of 1.2033, the largest fall since November 2006.
The sub-prime news pushed US stocks and Treasury yields sharply lower. Implied volatility of major currencies along with stock option volatility ticked up, contributing to the pullback in risk-taking among investors.
The Dollar was particularly vulnerable to the re-emergence of sub-prime concerns, which have nagged on investors all year, since expectations have increased the Federal Reserve will keep interest rates steady this year while other central banks raise rates. Benchmark US rates have held at 5.25% for more than a year, reducing the Dollar’s appeal to global investors. Overseas, the European Central Bank is expected to hike rates again in September to 4.25%, with some economists betting on a follow-up 0.25% to 4.5% by the end of the year.
Yesterday, the Bank of Canada raised interest rates to 4.50%. UsdCad rose 0.42% to 1.0542, benefiting modestly from the Canadian Central Bank’s less hawkish monetary policy statement.
Today’s Key Issues (time in GMT):
No US or UK major events or data releases scheduled
10.00 EUR ECB’s Hurley speaks in Dublin at Irish Central Bank event
10.00 EUR ECB’s Nicholas Garganas speaks in Athens
11.00 US MBA Mortgage applications July 6th
14.45 EUR ECB’s Tumpel-Gugerell speaks in Eltville
15.00 US Fed’s Plosser speaks to Economists on Policy in London
The Risk Today:
EurUsd broke 1.3659 resistance and hit yesterday 1.3784 new record high. Market went through 1.3681 high from April 27th and now focus on 1.3750 trend high. A return below 1.3659 former resistances will put the recent positive trend on hold. Market is now far away form a possible set back lower than 1.3373 which could open the way toward 1.3277 key support (50% retracement from 1.2872 to 1.3681 advance).
GbpUsd went sharply up to 2.0284 high yesterday. This marks the actual resistance. This clear move put the 2.0305 Trend in sight. Former resistance 2.0207 marks now the initial support. A break there support will open the door down to 2.0100 strong support.
UsdJpy reversed from six previous positive sessions. Yesterday, UsdJpy hit 120.98 low before closing 121.72. As expected, market turned down toward 122.24 former Trendline and 122.10 strong support from last week. Renewed strength will focus on 124.15 late June high. A break toward 124.15 will reopen the way to 125.57 December 2002 high. Initial resistance holds 122.10.
UsdChf failed to consolidate around 1.2200 level. Market went sharply down to 1.2001 low yesterday before closing 1.2033. On the recent downtrend, focus shifted on 1.1996 trend low support. Former support 1.2234 marks the initial resistance.
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Resistance and Support:
By Jean-Claude Braha - ACM Advanced Currency Markets, Geneva, Switzerland