US government hits its debt ceiling and US Treasury deploys extraordinary measures; USTs remain bid
EcoFin now looking at Greek debt reprofiling – some (modest) downside risks to EURUSD.
Upside surprise to UK CPI may provide limited support for GBP
Commodities continue to steer the FX markets with commodity currencies losing the most against USD. The risk of a deeper correction leaves AUD, NZD, CAD, and NOK most vulnerable. Despite the fact that the US hit its debt ceiling of USD14.294 trn, forcing the US Treasury to deploy USD210bn worth of extraordinary measures—as expected, US Treasuries remained bid. The extraordinary measures used by the Treasury buys some time (until August 2nd) for Congress to raise the debt ceiling before the US government could potentially default on its obligations, assuming no addition Congressional action is taken – very unlikely. We expect an agreement on the budget in mid-July.
Meanwhile we have a new development in the Greek debt situation, with (according to EU’s Juncker last night) European finance ministers for the first time floating the idea of talks with bondholders over extending Greece’s debt-repayment schedule. Europe would consider “reprofiling” Greek bond maturities as part of a package including stepped-up sales of state assets and deeper spending cuts, Juncker says. We have viewed a reprofiling, conducted in a ‘voluntary’ way via a debt exchange and which would not be classified as a credit (CDS) event as close to 50:50 likelihood in our scenario analysis of the Greek debt situation. While there is a concern that a reprofiling will be viewed as a tacit admission by policymakers that an eventual formal debt restructuring is probably inevitable and expect that this could weigh on the euro, we do not see significant damage done if reprofiling does indeed occur. We way learn a lot more during the course of today. For now expect the early week lows on EURUSD near 1.4050 to hold though we do see 1.4000 as vulnerable in the days ahead. Data wise we get ZEW today, with the current situation reading seen rising to 87.5 from 87.1 but economic sentiment and business sentiment both softer.
UK CPI later today should rebound by 0.7%m/m and to 4.1% y/y after last month’s surprise dip to 4.0%. An upside surprise to inflation may get the markets excited once again after the BoE inflation report failed to lower expectations of future hikes and the comment from BoE’s King saying that rates will have to rise at some point. This may offer GBP limited upside support ahead of BoE minutes on Wednesday but resistance for GBPUSD at the 50day moving average of 1.6292 should be safe. Finally RBA minutes, which somewhat hawkish, failed o dislodge current money market pricing, leaving AUD an oil trade for now.
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BNP Paribas
Corporate & Investment Banking