Sunday, July 24, 2011

US Takes Center Stage...

With the Euro Zone debt crisis now firmly in the rearview mirror (for now), the markets were intently watching the progress or lack thereof, of debt ceiling talks in the US. The results were not pretty for the Dollar as markets gapped against the greenback to begin the trade week. USD/CHF opened about 70 pips lower than Friday’s close of 0.8196 as traders looked for the safety of the Swiss Franc as US policy makers were failing in an attempt to complete a deal by today’s Asian open. The EUR/USD opened about 20 pips higher near 1.4385 and saw eventual highs near 1.4415 as traders fled the US unit. With the risk of a US default looming if a new debt ceiling cannot be agreed upon markets seemed thinned by a lack of participants who do not have the stomach for the volatility that surely lies ahead.

While the Swiss Franc firmed to .8120against the dollar, the unit also prospered against the Euro, seeing highs near 1.1660 late in the day. The Swiss Franc remains the prime destination for safe haven flows in times of uncertainty. Another commodity that flourishes in unrest, Gold, saw all time record highs near $1623.50 on a gain of almost $25 per ounce. The yen is also favored in these times, and saw 78.15 against the dollar which prompted Japanese officials to reiterated their stance about not wanting one sided moves in the FX markets. The yen crosses remained softer but steady against a backdrop of lower equities and US S&P futures falling.

As members of the US government try to hammer out a deal that will transcend political parties and avoid a potential August 2nd default, we will surely be in store for a bumpy ride in currencies. Although many believe the current standoff will eventually give way to a deal to raise the debt ceiling, it would not be unwise to be prepared for the worse.

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