Lingering Euro-zone Debt Issues Compounded By U.S. Debt Debate Lifts Dollar

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Fundamental Headlines

• Sales of Existing U.S. Homes Likely Feel for Second Month – Bloomberg

• U.S. Debt Supercommittee Ready to Announce Failure – Bloomberg

• Global Economic Outlook Grim, China tells U.S. Trade Talks – Reuters

• Pressure for Fast Action after Spanish Election – Reuters

• Moody’s Warns France on Rating – WSJ

European Session Summary

After a brief respite on Friday, markets resumed their orderly decline as trading began on Monday. Trading in the Asian session yielded little positive results, with higher yielding currencies and risk-correlated assets sliding through the end of Monday’s trade; the European session proved much worse, with the start of period encompassing a massive sell-off and flock to the Japanese Yen and the U.S. Dollar.

This sell-off, however, was not rooted in European concerns. That is not to say Euro-zone debt fears aren’t in the foreground; they continue to linger. Moody’s issued a warning to France, saying that its top credit rating is in jeopardy given the spread of contagion from the common market’s smaller states to its core ones. Considering Moody’s said “the deterioration in debt metrics and the potential for further liabilities to emerge are exerting pressure on France’s creditworthiness and the stable outlook – though not at this stage the level – of the government’s Aaa debt rating,” it appears this is just the tip of the iceberg for the core Euro-zone. Additional downgrades are expected in the coming weeks.

The main concern driving market participants is the Wednesday deadline for the U.S. Congressional Joint Select Committee. The JSC is a 12-member panel of both Democrats and Republicans, borne out of the debt deal reached in July to prevent the United States from defaulting on its obligations. As per the agreement reached between Democratic President Barack Obama and Republican Congressional leaders, the 12-member panel would find $1.2 trillion in deficit reduction over 10 years by November 23. Should no plan come together, $1.2 trillion in “trigger cuts” would occur, and the United States would very likely face another downgrade by one of the major rating agencies in the coming week(s). Thus far, the negotiations appear fruitless.

AUD/USD 5-minute Chart: November 20 to 21, 2011

Lingering_Euro-zone_Debt_Issues_Compounded_by_U.S._Debt_Debate_Lifts_Dollar_body_Picture_13.png, Lingering Euro-zone Debt Issues Compounded by U.S. Debt Debate Lifts Dollar

Charts created using Strategy Trader– Prepared by Christopher Vecchio

Higher yielding currencies and risk-correlated assets took it on the chin ahead of trading in New York, with the Australian Dollar down over 1 percent against the U.S. Dollar and the Yen. Similarly, the other commodity currencies, the Canadian Dollar and the New Zealand Dollar, were among the worst performers as well. The Euro was holding strong relative to its counterparts’ underperformance, though I speculate that this has to do with funds being repatriated by Euro-zone banks forced to raise their Tier 1 Capital; instead of issuing common stock or more debt, banks are selling off assets abroad and converting these proceeds back to Euros. Euro strength is not expected to persist for much longer; once the Euro sells off, the positive feedback mechanism currently in place could exacerbate strains in global financial markets.

Considering the state of global affairs – the Euro-zone sovereign debt crisis, emerging markets showing signs of slowing down and rising geopolitical tensions in the Middle East – failure by the JSC to reach an agreement by Wednesday could catapult markets back into a state of flux similar to what was seen in late-July / early-August.

24-Hour Price Action

Lingering_Euro-zone_Debt_Issues_Compounded_by_U.S._Debt_Debate_Lifts_Dollar_body_Picture_10.png, Lingering Euro-zone Debt Issues Compounded by U.S. Debt Debate Lifts DollarLingering_Euro-zone_Debt_Issues_Compounded_by_U.S._Debt_Debate_Lifts_Dollar_body_Picture_1.png, Lingering Euro-zone Debt Issues Compounded by U.S. Debt Debate Lifts Dollar

Key Levels: 12:45 GMT

Lingering_Euro-zone_Debt_Issues_Compounded_by_U.S._Debt_Debate_Lifts_Dollar_body_Picture_4.png, Lingering Euro-zone Debt Issues Compounded by U.S. Debt Debate Lifts Dollar

Thus far, on Monday, the Dow Jones FXCM Dollar Index is higher, trading at 9909.58, at the time this report was written, after opening at 9871.13. The index has traded mostly higher, with the high at 9926.14 and the low at 9856.66.

— Written by Christopher Vecchio, Currency Analyst

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com.

Follow him on Twitter at @CVecchioFX

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