Boehner deals with his own party, dollar slides

Republicans and Democrats seemed to be so far away from the compromise that Boehner decided to push forwards his own proposal in the Congress. However, even some deputies from his own party are uncomfortable with his proposal. Many say that it is more a quick fix rather than a permanent solution to fiscal problems. This hard line within his party means that it might be extremely difficult for Boehner to search a compromise with Democrats.

With no solution on the horizon and time running out the dollar is on the losing streak. We saw fresh records on the USDCHF on Monday, on AUDUSD today in the Asian trade (read below) and the USDJPY isn’t far from the records lows as well. The pair, following a multi-day narrow consolidation is just a figure above all time lows at 76,57. It is also close to the support at 77,40 (a target for the bears after leaving a consolidation).

European politicians showed last week that last-minute solutions are possible when there’s a lot at stake and it well may happen in the US sending the dollar up. However, until it does, markets continue to be terrified by thoughts of consequences of a downgrade.

AUDUSD – Aussie is strongest on record

Aussie chased other currencies as of late following a consolidation against the dollar. The direct trigger for a rally to fresh highs was today’s inflation report which revealed that Q2 inflation accelerated to 3,6% y/y from 3,3% in the first quarter. That will put RBA in an uncomfortable situation of rising inflation and weakening growth. There were more factors contributing to a recent surge on the Aussie, but most of them do not look sustainable:

-       Global weakness of the dollar – things may change here very quickly if there is a solution for debt ceiling

-       High commodity prices – often due to temporary supply constraints (oil, copper) with demand prospects weakening

-       Strength of other Asian currencies including NZD and JPY

Technically the pair has just reached the target from the recent consolidation breakout and look overbought. A surge above a rising channel may give some short-term fuel for the bulls but unless we see a massive sell-off of the US dollar (due to a downgrade), the outlook for the Aussie doesn’t look rosy, especially as investors will start to price in prospects of a slower growth. 

Event to watch – US orders, fuel inventories and Beige Book

US durable orders (8.30 ET, 14.30 CET, consensus +0,5% m/m for both – headline and the core) is the last report that might impact expectations for the Q2 GDP (advance release on Friday). Data on US fuel inventories (10.30 ET, 16.30 CET, a drop in oil inventories of 1,7 mln brls is expected) are must watch as oil prices are clearly awaiting a message. There is also a Beige Book later in a day (2 pm ET, 20.00 CET) and the decision on rates in New Zealand (no change expected).      

Przemysław Kwiecień PhD, Chief Economist

Disclaimer, investment risk warning
X-Trade Brokers Dom Maklerski S.A. does not take responsibility for investment decisions made under the influence of the information published on this website. more