British Pound Rallies after Mediocre GDP – Growth in Austerity Euro Ignores ECB Noyer’s Hawkish Musings, Poor Bond Auctions Australian Dollar Surges to Post-Float Highs on Strong CPI Figures New Zealand Dollar Looks Exposed as the RBNZ Decision Approaches Swiss Franc Seems to Have Dollar Rally Locked Regardless of Euro Gold Crawls on to Fresh Record Highs, US Crisis Clock Ticking Dollar Suffers Mixed Signals on Data and Budget Debate Though there was a significant drop in risk appetite through capital markets, a strong showing in consumer confidence and a remarkable rally from the US three-month Treasury bill; the greenback put in for a pained performance through Tuesday’s close. In fact, the Dow Jones FXCM Dollar Index (ticker = USDollar) marked its lowest close on records going back to 1999 and hit an intraday low through the new trading day’s Asian session for good measure. Why the disconnect? We have long ago left behind the era where scheduled event risk would generate an immediate and direct reaction from the greenback. However, there are still a few disciples that believe the currency maintains its position as a favored safe haven; and higher market rates would have leveraged a rally as recently as a month ago. The tumble to new lows today is a reflection of the prominent risks that the dollar and its economy faces as the threat of a downgrade grows. Keeping tabs on the budget standoff, there was no official statement from either US President Obama or House Speaker Boehner since Monday evening’s addresses that levied the blame against their respective counterparts. On the other hand, we did learn that the House of Representatives have postponed the vote on Boehner’s budget after non-partisan experts said it would not lead to the savings that were claimed. Regardless of whether this is the most effective plan or not, pushing back any viable solution for yet another day of debate simply erodes the market’s confidence. In the meantime, Obama’s Chief of Staff Bill Daley reiterated the White House’s belief that Boehner’s bill would not pass the pass the Senate and the Chamber of Commerce’s endorsement of the piece of legislation was “unfortunate”. In response to rumors that the president could evoke the 14th amendment to push through a hike to the budget ceiling, Daley said it would not be a “realistic answer”. Indeed, rating agencies seem to be caught in the gravity of a downgrade should a long-term deficit solution not be adopted. The threat of even a one-step downgrade to the United States’ top credit rating will completely distract the market until it is clear (or reasonably clear) that the benchmark Treasury is no longer in jeopardy – or until after the volatility dissipates following the market-changing cut. In the meantime, we should take note that the highly-liquid three-month T-Bill enjoyed its biggest single day jump since June 5th 2009 and the equivalent Libor rate is slowly starting to turn higher. One of the most prominent weights on the greenback’s shoulders is its exceptionally low market rate (honing in on the very foundations of any market interest in risk/reward). However, this bump in yield is a reflection of sliding demand or short-term Treasuries; and the return falls far short of compensating for the quickly rising risk. On the data front, the US consumer reported an unexpected improvement in confidence according to the Conference Board’s sentiment survey; but jobs, wages and planned major purchases were all struggling. In the upcoming session, we should watch for the Durable Goods release; but keep expectations for volatility tempered. British Pound Rallies after Mediocre GDP – Growth in Austerity Typically, when a data release prints in line with expectations; the market has already priced in the outcome and essentially moves on to the next potential catalyst. Yet, in the United Kingdom’s 2Q GDP release, the cumulative expectations for the indicator were not fully accounted for in the consensus forecast. Investor and consumer confidence has deflated for months as the signs of the government’s austerity measures manifested in themselves in employment, wage and business activity data. As such, when the ONS reported 0.2 percent growth through the quarter a slightly-off 0.7 percent clip of growth over the previous year (the slowest pace since 1Q 2010); it was read as a positive outcome. Euro Ignores ECB Noyer’s Hawkish Musings, Poor Bond Auctions Something for bulls to chew on Tuesday, ECB member Christian Noyer remarked in an interview that the central bank is still in a state of “strong vigilance” – the language that many rate watchers consider a sign that a hike is due at the next meeting. On the other hand, market watchers observed strained bond auctions by both Spain and Italy (the largest at-risk EU members). Regardless, this market is too numb to react. Australian Dollar Surges to Post-Float Highs on Strong CPI Figures The interest rate outlook for the Australian dollar has taken a distinctly dovish turn recently thanks to the trouble facing the economy’s housing market and trade channels with China. With the market pricing in as much as 55 bps worth of hikes over a 12 month period last week; the two-and-a-half year high 3.6 percent read in headline 1Q CPI gives strong reprieve to a currency holding the highest benchmark of its peers. New Zealand Dollar Looks Exposed as the RBNZ Decision Approaches Moving forward, traders will be looking to see if the RBNZ rate decision can deliver the same level of leverage to the kiwi dollar that the Australian CPI figures offered the Aussie currency. That is unlikely. The kiwi is at record highs against the US dollar and is showing extraordinary strength against most of its counterparts. Steady performance is the most likely bullish outcome; but the greatest risk is dovish Bollard remarks. Swiss Franc Seems to Have Dollar Rally Locked Regardless of Euro Though it isn’t a solid bull trend, EURCHF has restrained itself from reviving its long-term dive. In fact, the Swiss franc gave back considerable ground against the British pound, Japanese yen and Australian dollar over the past 24 hours. Then why is USDCHF dredging new lows? In a sign that the market is seeking a genuine alternative to the troubled dollar, demand for the yen and franc will remain robust. Gold Crawls on to Fresh Record Highs, US Crisis Clock Ticking Another day, another record high. Gold posted a new record high close through the end of Tuesday’s trading session. Yet, what if we look at the metal’s value in euro, sterling or Australian dollar terms? When we price the commodity in these alternative currencies; we are near highs but well off historical peaks. Once again, we are seeing the broad distaste for the US dollar and gold’s strong appeal as an alternative.

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