EUR/USD (1.4205) US private spending went unexpectedly negative in June, suggesting that consumers are already bolstering themselves against the effects of a slowing economy. Although many stock market participants had been expecting a relief rally shortly after the US debt-ceiling resolution, they instead got a mighty sell-off. Given that consumer spending comprises some 70 percent of GDP, the US Congress might have done better to divert these consumer savings to tax revenues in order to keep some spending going. US stock markets pitched lower, but the EUR/USD was nevertheless steady, despite a safe-haven flight that has historically pushed the US dollar higher. Perhaps lingering concerns over the US credit rating are holding traders back. Moody’s announced yesterday that US creditworthiness is on negative watch, and Dagong Global Credit Rating downgraded Treasuries from A+ to A. Granted, China’s State Council ratings aren’t written into the vast majority of financial contracts, but the news supports many traders’ suspicion that S&P will eventually lower Washington’s rating from AAA to AA.
Spain and Italy’s bond spreads surged to new euro-era highs yesterday, seemingly inviting global investors to shun the euro. Indeed, the impression that these two eurozone members are being pulled into the funding crisis vortex causes many wonder to why the euro isn’t already trading below $1.40. In contrast, we see the euro as stable above 1.4110 and expect only thin resistance ahead of 1.4400.
Market Bias Index
The apparent safe havens are in the CHF and the JPY although, in truth, short covering in the franc and the expectation of a BoJ intervention causes the gap between the two to be wider than it might otherwise be.
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Deutsche Bank
Fixed Income Research – Global