EUR USD (1.4615) Fitch warned yesterday that the US risks losing its AAA bond rating if the Treasury does not repay a bill maturing on August 4th. US Republicans are reportedly playing with the idea of a temporary default when the Treasury runs out of money on August 2nd, as a strategy to pressure Congress for deeper spending cuts in the US budget. The PBoC warned Washington that it is playing with fire, saying that a default could further devalue the US dollar. Given that Fitch threatened to downgrade US paper to B+ in the event of a default, and that China is presently sitting on some $1,000bn in US debt, the PBoC is understandably worried. Indeed, forcing a temporary default to gain the upper hand in the budget debate would be only a pyrrhic victory for lawmakers bent on austerity. Once a sovereign defaults, its debt rating isn’t automatically repaired when the debt is made good. Lenders tend to view default as a behaviour pattern, and the borrower pays the penalty for years to come.
Market participants largely expect Jean-Claude Trichet to refer to the Governing Council’s ‘strong vigilance’ at the ECB’s rate-setting meeting today, which would suggest a tightening of monetary policy in July. One might expect them rather to sell the euro when Trichet utters the code words – on the basis of ‘buy the rumour sell the fact’. Perhaps yesterday’s selling activity in the euro was already in anticipation of the event; market participants are apparently that sure it will happen. The euro still has the chance to reach 1.4775, but an undercut of the 1.4510 support would curtail the upside dynamic.
Market Bias IndexTM
The changes in the Market Bias Index are limited because prices didn’t move too much. It is the passage of time that is doing the job of dragging the biases back to zero.
Deutsche Bank
Fixed Income Research – Global