Despite the lowering of the US credit rating by S&P the USD proved it is still the go to currency when risk sentiment falls. Multiple policy moves this weekend highlighted by an expansion of the ECB bond buying program failed to prevent a slide in equity markets.
A hodgepodge of policy action did little to impede the negative market sentiment. After initially opening weaker in early Asian trading the USD was bid following a rollover of European bourses. The Nikkei finished down 2.18% while the London FTSE was lower by 1% and the German DAX down 1.67%.
The ECB began buying Italian and Spanish debt with rumors of EUR 5 bn worth of purchases in the 5-year series of both countries. The purchases look to have temporarily succeeded in bringing the yields lower but the expanded bond program may come with a price tag of a bloated ECB balance sheet, reduced creditability as the ECB holds increased amounts of riskier debt, and potential for an higher values in the EMU money supply as large bond buyback programs may prevent the ECB from sterilizing the currency flows the central bank puts out into the market.
A statement from the G7 was released in early Asian trading and sounded supportive towards further intervention from Japanese officials but stopped short of supporting a coordinated policy of intervention to support the USD or weaken the JPY.
While equity markets sank the USD received a safe-haven bid and the EUR/USD was sold at 1.4400 this morning. It appears the ECB bond buying program has either failed to regain the market's confidence or was simply not large enough to provide a "shock and awe" effect. EUR/USD support comes in at last Friday's low of 1.4050 followed by the 200-day moving average at 1.3940. Sterling is also weaker versus the dollar but has a more positive technical tone. Resistance is found at 1.6475 with support at 1.6230 where the 55-day moving average comes in.
After reaching a new all-time low at 0.7525 the USD/CHF moved higher 100 pips on USD strength. AUD and Kiwi are off sharply as the commodity currencies continue to struggle in this "risk-off" environment. The NZD/USD is testing a trend line from the 2009 March low at 0.8330. A break here may test 0.8100 from the mid-July low.
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